Intern SCM Presentation

SUMMARIES
CASE STUDIES
Unilever, Managing International
Supply Chains
Zaras Vertical Supply Chain
Superquinn & Coca-Cola HBC
(Ireland)
Mattel, European Distribution
Carrefour France, Pooling
Gruppo PAM and Number 1 Logistics
Group, Italy
Automation in CVS/Pharmacy, USA
Metro Group Logistics Germany, FGP
and Cross-Docking
Wal-Mart, Assimilating International
Operations
Exel and Unilever UK, Foods Freight
Management
Auchan (France) Using the Canal
Network
Wal-Mart, China
Carrefour, China
Procter & Gamble, China
Auchan Group, International
Sourcing
Tesco, Hungary
Henkel, Central & Eastern Europe
Carrefour Poland, Multi Cross Dock
KEY FOCUS
Distribution Parks
Sale and Lease Back
Reckitt Benckiser France, Shared User
Networks
Automation in Tesco, UK
SPaP Bratislava, Inter-Modal Hub
Management
Asda UK, Use of Ports
Kursiu Linija
Wal-Mart US, RFID Roll-Out
Metro/Nestl & SATO Germany, RFID
Key Findings & Executive Summary
Chapter 1 - International Supply
Chain Barometer
Chapter 2 - Supply Chain
Optimisation
Chapter 3 - International Differences
and Emerging Markets
Chapter 4 - Best Practice Supply
Chain Management
INTERNATIONAL SUPPLY CHAIN
BAROMETER
IGDs International Survey
The Supply Chain Overview
Outsourcing
Supply Chain Challenges
SUPPLY CHAIN OPTIMISATION
Optimisation through Warehousing
Technology in Supply Chain
Optimisation through Transport
INTERNATIONAL DIFFERENCES
AND EMERGING MARKETS
Managing International Differences
China - Retailing and Global
Sourcing
India - Retailing Opportunities
Central & Eastern Europe
BEST PRACTICE SUPPLY CHAIN
MANAGEMENT
Enablers of Best Practice in Supply
Chain
Continuous Improvement
Best-in Class Companies
Top Supply Chain Projects
Contents
List of Tables
List of Figures
MANAGING INTERNATIONAL
SUPPLY CHAINS
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Managing InternationaI
SuppIy Chains
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Report
Managing International
Supply Chains
Identifying best practice across borders
IGD, Grange Lane, Letchmore Heath, Watford, Herts, WD25 8GD, UK
Tel: +44 (0)1923 857141 Fax: +44 (0)1923 852531 Email: igd@igd.com Website: www.igd.com
IGDis a charity that actively helps people to grow by bringing together intelligence,opinion & experience from the
food & grocery chain. We believe that when people have the best knowledge they make the best decisions,leading
to results that benefit them,their organisation and ultimately the general public. We search across the chain for the
best knowledge and work with people throughout their careers to develop their full potential.This report is
published by IGD Services,which raises funds to support the charity.
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Institute of Grocery Distribution 2006. All rights reserved.
No part of this publication may be reproduced, stored in a retrieval system or transmitted in
any way by any means, electronic, mechanical, photocopying recording or otherwise without
the prior permission of the Institute of Grocery Distribution, a registered charity and company
limited by guarantee registered in England no.105680.
IGD is the trade mark of the Institute of Grocery Distribution.
Under the terms and conditions of this contract, IGD authorises you to;
View and print out the material for personal use only
Extract small amounts of text, tables and charts for inclusion within internal company
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Alter the material in any way
Failure to adhere to these conditions will result in the immediate termination of your access
to this information.
IGD 2006
Who Are We?
We aim to be the leading source of information, research and education for the food &
grocery industry. We are unique in that we are the only organisation in the world that has
members from all parts of the food and grocery market, including retailers, caterers,
wholesalers, distributors, manufacturers and farmers.
From this unique position we are experts on the grocery supply chain and also have a
good understanding of shoppers. We have no vested interests and we do not lobby. We
bring the whole industry together to address issues and examine strategies for the
future.
What Do We Do?
We are a one-stop shop for information, research and education for the food and grocery
industry. At IGD we are passionate about this industry and work hard to bring people
together to improve mutual understanding.
Our main activities are:
Producing business reports. Analysing developments and forecasting trends in the
food and grocery industry
Running educational programmes. We run a variety of training courses and our
conference programme is renowned throughout the industry
Keeping close to the shopper. We conduct regular consumer research to
understand the big issues that concern consumers
Bringing people together. We develop practical best practice guidelines that also
benefit the consumer
Providing free information. Fact sheets and industry best practice guides are now
available on-line free of charge and our information unit is there to provide answers
to queries (the information unit service is only free of charge to members of IGD)
For more information please visit our website: www.igd.com
IGD
Grange Lane, Letchmore Heath, Watford, Herts WD25 8GD, UK
Tel: +44 (0) 1923 857 141
Fax: +44 (0) 1923 852 531
Email: igd@igd.com
www.igd.com/supplychain IGD 2006
Managing International
Supply Chains
January 2006
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or
transmitted in any way or by any means, electronic, mechanical, photocopying, recording or
otherwise, without the prior permission of the Institute of Grocery Distribution, a registered charity
and company limited by guarantee registered in England no. 105680. Registered Office: Letchmore
Heath Watford WD25 8GD (01923) 857141
Whilst every effort has been made to ensure that the information contained in this publication is
correct, neither IGD nor any of its staff shall be liable for errors or omissions however caused.
ISBN 1-904231-99-3
www.igd.com/supplychain
IGD 2006
Contents
List of Tables i
List of Figures iii
Key Findings and Executive Summary 1
1. International Supply Chain Barometer 13
1.1 IGDs International Survey 14
1.1.1 IGD Research Methodology 15
1.1.2 What is Your Business? 16
1.1.3 Which Country Operation(s) Do You Represent? 17
1.2 The Supply Chain Overview 18
1.2.1 The Definition 18
1.2.2 Which Functions or Departments are Part of Supply Chain? 20
1.2.3 How Important is Supply Chain in Your Companys Strategy? 21
1.2.4 How is Your Supply Chain Managed? 23
Case Study - Unilever, Managing International Supply Chains 25
Case Study - Zaras Vertical Supply Chain 27
1.3 Outsourcing 31
1.3.1 Penetration of Outsourcing to Third Party Logistics Providers 31
1.4 Supply Chain Challenges 35
1.4.1 What Key Challenges are Facing Supply Chain in Your
Area of Operation? 35
Case Study - Superquinn & Coca-Cola HBC (Ireland) 37
2. Supply Chain Optimisation 45
2.1 Optimisation Through Warehousing 47
2.1.1 Centralised Distribution Hubs 47
Key Focus - Distribution Parks 47
Case Study - Mattel, European Distribution 48
2.1.2 Warehouse 'Sale and Lease-Back' Schemes 50
Key Focus - Sale and Lease-Back 50
2.1.3 Consolidation and Shared-User Initiatives 50
Case Study - Carrefour, France, Pooling 51
Case Study - Gruppo PAM and Number 1 Logistics Group, Italy 52
Key Focus - Reckitt Benckiser France, Shared-User Networks 54
2.2 Technology in Supply Chain 55
2.2.1 Automation and Automated Distribution Centres 55
Key Focus - Automation in Tesco, UK 57
Case Study - Automation in CVS/Pharmacy, USA 57
contd.../
IGD 2006
Contents (continued)
2. Supply Chain Optimisation (continued) 45
2.2.2 RFID/EPC 59
Key Focus - Wal-Mart US, RFID Roll-Out 61
Key Focus - Metro/Nestl & SATO Germany, RFID 62
2.2.3 Global Data Synchronisation (GDS) 62
2.3 Optimisation Through Transport 65
2.3.1 Factory Gate Pricing 65
2.3.2 Cross-Docking 66
Case-Study - Metro Group Logistics Germany, FGP and
Cross-Docking 67
2.3.3 Intermodality - A European Perspective 69
Key Focus - SPaP Bratislava, Inter-modal Hub Management 70
Case-Study - Auchan France, Using the Canal Network 71
Key Focus - ASDA UK, Use of Ports 73
Key Focus - Kursiu Linija 75
2.3.4 4th Party Logistics Transport Management 75
Case-Study - Exel and Unilever UK Foods, Freight Management 76
3. International Differences and Emerging Markets 77
3.1 Managing International Differences 78
Case-Study - Wal-Mart, Assimilating International Operations 80
3.2 China Retailing and Global Sourcing 82
3.2.1 Key Developments 82
Case-Study - Wal-Mart, China 83
Case-Study - Carrefour, China 84
Case-Study - Procter & Gamble, China 85
3.2.2 Opportunities in Global Sourcing 86
3.2.3 Challenges for Global Sourcing 86
Case-Study - Auchan Group, International Sourcing 91
3.3 India Retailing Opportunities 93
3.3.1 Distributors 93
3.3.2 Sales Field Force 94
3.3.3 Legislation 95
3.3.4 Inventory Challenges 96
3.3.5 National Brand Coverage 96
3.3.6 Infrastructure Challenges 97
3.3.7 Delhi versus Mumbai 97
3.3.8 Supply Chain Improvements 97
3.3.9 The Future 98
contd.../
Contents (continued)
3. International Differences and Emerging Markets (continued) 77
3.4 Central & Eastern Europe Supply Chain Restructuring 99
3.4.1 Supply Chain Advantages 99
3.4.2 Supply Chain Trends 100
Case-Study - Tesco, Hungary 101
Case-Study - Henkel, Central and Eastern Europe 103
Case-Study - Carrefour Poland, Multi Cross Dock 105
4. Best Practice Supply Chain Management 107
4.1 What Unit Measure of Performance Do You Benchmark? 109
4.2 External Benchmarks 111
4.3 Availability 112
4.4 ECR Scorecard 113
4.5 How do you Analyse the Root Cause of Success? 114
4.6 How Do You Transfer Improved Performance to Other Parts of the
Business? 116
4.6.1 Formal and Informal Methods 116
4.7 Enablers of Best Practice in Supply Chain 118
4.7.1 People 118
4.7.2 Process 118
4.8 Continuous Improvement & Re-Engineering Approaches 119
4.8.1 Business Process Re-engineering (BPR) 119
4.8.2 Total Quality Management (TQM) 119
4.8.3 Lean Methodologies 120
4.9 Best-in-Class Companies 121
4.9.1 Which Retailer Do You Most Admire? 121
4.9.2 Which Manufacturer Do You Most Admire? 124
4.9.3 Which Service Provider Do You Most Admire? 125
4.10 Top Supply Chain Projects 127
4.10.1 Demand Planning and Forecasting 127
4.10.2 Cost Management 128
4.10.3 Inventory Management 128
4.10.4 Customer Service 128
4.10.5 Production, Warehousing and Distribution 128
4.10.6 Availability and Retail Ready Packaging 129
4.10.7 Data Issues and IT Improvements 129
4.11 In Summary 130
IGD 2006
www.igd.com/supplychain IGD 2006 i
List of Tables
Examples of International Retail Expansion 14
Companies Contributing to IGD's Survey Research 15
Sample Job Titles Responding to IGD's Research 16
Views of companies with Supply Chains being of 'Medium' strategic importance 22
Views of companies with Supply Chains being of 'High' Strategic Importance 22
Organisational Structure 24
Unilever HPC Critical Success Factors 26
Lead Logistics Provider by Supply Chain Management Structure 33
Key Supply Challenges 35
Results versus Target 40
Solution Sets 46
The Process 56
The Process 57
Benefits of GDS 63
Short-Sea Shipping - Opportunities and Challenges 74
International Differences in Supply Chain Challenges 78
Opportunities for Global Sourcing 86
Challenges of Global Sourcing 87
Choosing a Distributor 94
Inventory Challenges 96
Modes of Transport 97
Examples of Central & Eastern European Growth 100
IGD 2006
ii
List of Tables
Supply Chain Performance Measurement Matrix 109
Standardisation and Simplification 110
External Benchmarks 111
Root Cause of Success 114
Review and Share Performance Data 114
How do you improve performance? 115
Formal & Informal Methods of Performance Transfer 117
Winning Characteristics for the 'Leading' Retailer 121
Winning Characteristics for the 'Leading' Manufacturers 124
Winning Characteristics for the 'Leading' Service Providers 125
Opportunities for Supply Chain Improvements 127
Focus of Top Supply Chain Initiatives 127
Winning Characteristics 130
www.igd.com/supplychain IGD 2006 iii
List of Figures
Key Elements in Supply Chain Management 18
Strategic Importance of Supply Chain 21
Organisational Design 23
Balancing In-house and External Operations 28
The Learning Programme Project Plan 37
Process Flow at Each Stage of Implementing NPI to Store 42
Pressures for Greater Supply Chain Efficiency 46
Global Data Synchornisation Vision 63
What Makes up the Total Product Cost? 66
Distribution Network in India 94
ECR Scorecard Process 113
Methods of Performance Transfer 116
Enablers of Supply Chain Best Practice 118
Use of Continuous Improvement Techniques 119
Most Admired Retailer 121
IGD 2006
iv
Key Findings and Executive Summary Managing International Supply Chains
1 IGD 2006
Key Findings and Executive Summary
Key Findings and Survey Results
1. The top three international supply chain challenges have been identified as Demand
Planning & Forecasting, Retail Ready Packaging and New Product Introduction.
2. The top five focus areas for international supply chain projects have been identified
as: Demand Planning and Forecasting; Cost Management; Inventory Management;
Customer Service; Production, Warehousing and Distribution.
3. From a supply chain perspective, Tesco and Procter & Gamble were cited as the most
admired companies in the industry.
4. The emerging markets of China, India and Central & Eastern Europe continue to offer
low production costs but now offer significant international retail opportunities.
5. Transferring best practice across geographies should be done in a simplified and
standardised way, and the key enablers are people and processes. But there are
differences between organisations: from more formalised methods, such as global
management roles, through to more informal methods of multi-discipline project
teams.
6. 64% of surveyed companies say that supply chain performance is of high importance
to their company but many still think that their sphere of influence does not extend
past delivery to the retailer.
7. Mirroring the trend for end-to-end supply chain solutions offered by third party
logistics providers, 60% of companies surveyed outsource their warehousing
operations, whilst 70% outsource their transportation.
8. Factory gate collections and cross docking practices are becoming more widespread
across international markets, as retailers explore the opportunity of reducing cost and
improving service levels.
9. There is increasing demand for inter-modal services, but a level of harmonisation in
infrastructure across Europe is still required before the true benefits can be fully
realised.
10. The challenges of getting businesses to truly collaborate cannot be underestimated,
but getting it right can yield significant benefits. Collaborative practices are fast
becoming a pre-requisite to doing business.
11. Where the supply chain is being seen as a key element in driving competitive
advantage, organisational capability and business integration, companies are starting
to take a holistic approach to organisational structures and integrate supply chain
functions.
2
IGD 2006
12. Traditional methods of driving logistics efficiencies, such as tariff management, full-
load deliveries and competitive tendering, now combine with cross-docking,
consolidation, and leading-edge technologies to create a significant business
improvement tool-kit.
3 IGD 2006
Executive Summary
International Supply Chain Barometer
Through primary research conducted in 2005, IGD has identified the current status and
views of practitioners on international supply chains.
Whilst the holistic view of supply chain involves both information and product moving
from raw material right through to the end shopper, many companies still think that their
sphere of influence stops with delivery to the retailer - whether at the distribution centre
or at the store.
The supply chain is now being seen as a key element in driving competitive advantage,
organisational capability and business integration. With 64% of respondents viewing
supply chain as being of high strategic importance.
Strategic Importance of Supply Chain
Source: IGD Research, 2006
64%
26%
10%
High
Medium
Low
Where there is greater understanding of the inter-dependencies between logistics, sales
and production, companies are starting to challenge more traditional organisational
structures and integrate supply chain functions.
Whilst functions such as Purchasing, Manufacturing and Distribution tended to be the
most commonly-cited functions playing a key role in supply chain, the move to
incorporate more traditionally customer-facing roles, such as Sales, Marketing and
Customer Services is increasingly apparent.
A large proportion of companies are now outsourcing their warehouse and distribution
functions to third party logistics providers. Of respondents:
60% outsourced warehousing
70% outsourced transportation
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IGD 2006
Those companies who outsource elements of their supply chain were also aware of the
complexities this may bring in managing a number of different logistics operators.
To assist with this added potential complexity, logistics providers are looking to become
'lead logistics providers' with integrated technology solutions. Such integrated solutions
may incorporate activities from labelling, packaging and 'in-store' replenishment
initiatives through to global sourcing and international freight management. Such 'end-
to-end' solutions assist retailers and manufacturers to improve their total supply chain
visibility and achieve efficiencies through integration, streamlining and improved real-
time data.
As the supply chain responsibilities have been broadening, the respondents in the survey
cited the top supply chain challenges facing their businesses:
Key Supply Challenges
Challenges Facing Supply Chain Percentage of Replies
i.
ii.
iii.
Demand Planning & Forecasting
Retail Packaging
New Product Introductions
72%
54%
54%
iv.
v.
vi.
vii.
viii.
ix.
Fuel Costs
Availability
Multi-Modal Distribution
Labour Shortages or constraints
Shrinkage
Other
48%
44%
24%
22%
15%
9%
On-shelf availability is a key area of focus within all of the top three cited challenges,
impacting significantly on the likelihood of a shopper finding the product they want, at
the time they want it and in the quantity they want to purchase. The biggest proportion
of respondents identified the ability to accurately plan and forecast demand as their
number one issue. This issue is particularly important in an international supply chain
environment where there is increased uncertainty around lead times and reliability of
service.
Improving the levels of collaboration between trading partners will be an important step
in meeting those challenges head-on, and delivering the right service levels, in the most
efficient and cost-effective way.
Supply Chain Optimisation
A number of factors have been impacting on the supply chain, adding complexity and
increasing pressure on costs, service, availability and the need to accurately plan and
forecast demand. The chart highlights these pressures.
5 IGD 2006
Pressures for Greater Supply Chain Efficiency
More Promotions
Global Sourcing &
Longer Lead-Times
Price Sensitivity
Fuel Costs
Congestion
Retail
Packaging
Skilled
Labour
Shortages
New Product
Introductions
Costs
Service Levels
Availability
Demand
Planning
Companies are responding through a variety of supply chain initiatives to help maintain
total costs, service levels, availability and accurate demand planning.
Traditional methods of driving logistics efficiencies, such as tariff management, full-load
deliveries and competitive tendering, now combine with cross-docking, consolidation,
and leading-edge technologies to create a significant business improvement tool-kit.
Solutions are highlighted in the table below:
Solution Sets
Then Now
Tariff Management
Full Load deliveries
Safety Stocks
More Frequent Deliveries
Routing efficiencies
Competitive Tendering
Centralised Distribution Hubs
Warehousing Sale & Lease-Back
Consolidation & Shared User Initiatives
Vendor-Managed Inventory
Cross-Docking & Factory-Gate collections
Increased use of Technology
Whilst some companies are moving into large-scale centralised distribution parks, that
will sometimes service several countries from one single location, others are selling off
their warehousing assets, and then leasing them back, thereby reducing capital
commitments and injecting cash into the business.
Warehouse automation continues to prove that technology can bring significant
operational benefits for some companies. The following table highlights potential
benefits and considerations when looking to introduce automation.
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IGD 2006
Benefits of Automation Challenges of Automation What to Watch
Lower long-term operating costs. High initial capital investment. Software specification and configuration - the
best-designed solution will still fail to deliver the
desired results if the software is poorly configured.
The marginal cost of volume
increases is much less than with
manual systems.
It can be difficult to adapt if
significant business changes occur.
Training - despite automation, people are still
employed in a whole variety of roles, and these
people need to understand the systems and
processes in detail, and ideally to have used them
before the facility 'goes-live'.
Improved accuracy in picking and
loading.
Automation represents a long-
term commitment, from which it is
not easy to disengage.
Exception Management - systems must be
designed to be able to manage the exceptions in a
user's business model, no matter how small,
because any level of manual intervention or
reconfiguration is likely to increase costs.
Improved productivity and speed
of response.
There is a requirement for long-
term planning and vision, well in
advance of implementation.
Source: Exel, 2005/IGD Research, 2006
Other new technologies like RFID/EPC and the benefits of Global Data Synchronisation
remain firmly on the industry agenda. However there are still a number of challenges that
continue to limit widespread adoption, not least the ability to create a solid business case
for the large scale investment.
Transport costs account for a significant proportion of total supply chain costs, and these
are being challenged across many international markets by fuel cost increases, legislative
changes, road tolls and a lack of investment in transport infrastructure.
Factory-gate collections and cross-docking practices are becoming more widespread, as
retailers in particular understand the real benefits of increased inbound cost visibility,
and the opportunities for integrating transport fleets.
Inter-modal activity is on the increase across Europe in particular, as more and more
companies look to move freight back onto the rail and canal networks. There is also a
growing trend for short-distance sea-shipping. Logistics service providers want to
capitalise on improvements in these linkages to offer full end-to-end supply chain
solutions.
International Differences
IGD's international survey confirmed that companies encountered different supply chain
challenges depending on the market in which they operate. These differences can be
grouped under cultural; infrastructural & operational; internal & external business
management issues; and legislative differences. The challenges and examples of these
are shown in the following table:
7 IGD 2006
International Differences in Supply Chain Challenges
Theme Challenge Examples
Cultural
Different shopper preferences, particularly
with regards fresh produce
Different language variants/customisation
Germany prefers lean meat
Japan prefers meat with more fat
Indians prefer to shop in wet markets for fresh
produce, rather than modern supermarkets
Infrastructure &
Operational
Lack of cold chains in some developing
markets
Bottlenecks at ports
Export and goods movement permit controls
A lack of truly international logistics
companies means that different contractual
agreements have to be made for different
countries
No public cold chain logistics supply in China
South American ports
Permit issues in Russia and former Soviet
Union states, India and China
Internal
Demand volatility depending on brands life-
cycle
For retailers, international franchise operations
are generally managed differently from
wholly-owned stores
Critical mass can be an issue in developing
markets, leading to service level issues
When exporting, the required quantities are
often fixed well in advance, compared to
'home territory' orders which can be very
volatile
Availability issues in some developing markets
can be solved through using extra lower-cost
labour, whereas in more developed markets
alternative solutions are required
External
Different approaches to bar-coding,
packaging, case-sizes, shelf-ready packaging,
and pallet requirements
Different trade structures, with different levels
of market concentration, require different
outbound logistics solutions and demand
planning
Different performance management
In the UK and northern Europe there tends to
be more centralised distribution and delivery
into distribution centres, whereas in Italy,
Spain and southern Europe, there is a
tendency for more direct-to-store deliveries
The UK focuses heavily on delivery within a
fixed hour delivery slot, whereas in France it
could be delivery on the day, but with heavy
penalties if this is missed
The UK is viewed as one of the most difficult
markets to satisfy, due to short lead-times and
demand fluctuations
Legislation
Different legislative requirements for
permissible ingredients in food products
Different requirements for ingredient
declarations and labelling
Different legislation for driver hours
Switzerland - vis--vis the adoption of the
European Working Time Directive - Transport
8
IGD 2006
The emerging markets of China, India and Central & Eastern Europe offer a plethora of
opportunities for the food and grocery industry, in terms of global sourcing, cheaper
production costs, and large populations with high, but relatively untapped consumer
demand.
With 12.9% retail growth in 2005 alone, IGD predicts that China will become the second
largest food retail market in the world by 2020, with India also moving into a top five
position. With widespread investment from the leading international food & grocery
players, further supply chain development will certainly encourage this trend.
Opportunities for Global Sourcing
1. Lower wages
2. A large, flexible and well-educated work force
3. High local growth - New markets expand at a quicker rate than more developed markets
(China +8% growth compared to the EU average of +2%).
4. The market for prime materials is already global, and countries have specialised over time so
that companies must act global to reach every production zone. For example whilst China
has focused on garments, hardware and electrical goods, Thailand has looked at food and
plastic products, and India has focused on home textiles, shoes, garments and decoration. This
global reach means that wooden furniture, for example, could have the wood imported from
Brazil, be crafted in Vietnam, but then sold into the EU.
5. Buying directly from the factory on an 'ex-works' basis could bring a margin bonus of
anything from 10-50%, and in times of consistent margin pressures, this is an attractive option
for many companies.
Source: Auchan 2005/IGD Research, 2006
Nevertheless, combining the size of these countries and the remoteness of some of their
populations, with a number of legislative restrictions and infrastructural limitations, there
are significant challenges for the speed of supply chain transformation.
China
The Chinese economy is booming, competition is on the increase, and retailers are not
only sourcing large quantities of product from the country, but are also opening
increasing numbers of stores, as the Chinese government continues to reduce
restrictions on foreign direct investment.
Opportunities in global sourcing include high local growth rates, driving further
investment and stability, and a cheaper, flexible workforce, which can help improve
margins.
A combination of organic growth and supply chain development will help retailers
consolidate their market positions, especially as international retailers hold only 3-4%
share of the total grocery market.
9 IGD 2006
India
India currently restricts foreign direct investment from multi-brand retailers, and so it
is fair to say that there has not been the same level of investment in developing
modern retailing practices and new transport links as has been the case in China.
Leading manufacturers, however, are present in the Indian market, and via the
distributor route to market, and with the use of field sales forces, are able to reach the
most remote areas of the country and improve their brand awareness.
Distribution Network in India
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Distributor
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Wholesaler Retailer
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Central & Eastern Europe
Similarly to China and India, as a result of significant political change and the
subsequent high levels of economic growth, the countries of Central & Eastern Europe
have also become attractive places to invest, in terms of both manufacturing
production and international retail expansion.
The advantages of countries such as Poland, the Czech Republic and Hungary, are that
they benefit from cost-effective labour and a culture of hard work, but without the
long transit times for delivery.
Best Practice Supply Chain Management
Transferring best practice across departments, markets and geographies is a key method
for driving international efficiencies and improving end-to-end capabilities, but this
should be done in a simplified and standardised way.
Key supply chain performance measures focus primarily on: availability, forecasting,
service levels, order fulfilment, financial indicators, warehousing, transport, and inventory.
Order fulfilment is the most common performance measure. The following matrix shows
examples of supply chain performance indicators:
10
IGD 2006
Supply Chain Performance Measurement Matrix
Availability
On-shelf availability (OSA)
Items out-of-stock (OOS)
Stock availability
Supplier/Wholesaler availability by
SKU
Forecasting
Forecast accuracy
MAPE (Forecast error)
Conformance to manufacturing plan
SKU forecast accuracy
Sales forecast accuracy
Service Levels
Customer service
Supplier delivery performance
Service levels
Order Fulfilment
On-Time In-Full (OTIF)
OTIF (All costs)
Case fill rate
Order fill rate
Inventory
Inventory management
Stock-holding
Stock turnover ratio/Forward weeks'
cover
Working capital (Inventory values)
Warehousing
Pick Accuracy
Pick Rates
Cost per case
Handling costs per m3
Cost per pallet
General Financial
Supply chain costs as a % of net
sales
Lost Sales
Invoice accuracy
First-time invoice acceptance
Low code sales
Cost savings
Cost per unit delivered
Cost vs. volume vs. turn-over
Profitability vs. cost
Transport
On-time deliveries, late deliveries &
delivery windows
Drop-size
% of direct delivery
Vehicle utilisation
Load efficiency
Distribution cost per case/m3
Cost by kilometre
Other
All components of the 'perfect order'
SKU complexity
Waste/Write-off
Non-quality costs
Lead-time achievement
Time/Speed to market
Information efficiency
Distribution build
Cost of production of best quality
product (which is different for
different regions)
External benchmarking is gained primarily from the retail customer sharing information
on cross-supplier performance and is often based on order fulfilment and availability. In
addition, there are a variety of other methods used by companies, including the ECR
Scorecard, industry bodies, and external consultancy firms.
External Benchmarks
Customer Industry Body/Expertise Other
Customer OTIF
Customer tables or service
level reports, comparing
with peers
Retailer KPI's
Retailer availability data
Case fill rate (shared by
retailers)
External consultants x3
IGD
ECR Scorecard
ELUPEG forum (inter-
company comparisons)
Nothing concrete - based
in international experience
Tendering
In-market distributors
None
11 IGD 2006
Root cause analysis of good performance is most likely to be shared around a business
via internal reporting methods and communication processes, including collaborative
work between trading partners. Improved use of data, greater internal and external
communication, and focus on inventory management and forecast accuracy are all key
factors in improving overall performance.
In terms of transferring best practice around the business, there are differences between
organisations, from more formalised methods engraved in organisational structure, such
as 'global' management roles, through to more informal methods via multi-discipline
project teams. In this way, the key enablers for supply chain best practice are people and
processes.
There are a number of standardised continuous improvement techniques used across
the food & grocery sector, particularly amongst the supplier base. The production
environment lends itself to process re-engineering techniques, total quality
management initiatives and lean methodologies. Process management is the most
common method employed by the international companies surveyed by IGD.
Formal & Informal Methods of Performance Transfer
Formal
Informal
Global Roles Some organisations have global roles, with
accountability for developing, spreading and training
best practice solutions. These can take the form of
country visits, teleconferences, intranet utilisation and
best-practice presentations.
Some organisations argue that if the business is
managed at an international regional level (e.g.
Europe), then improvements become visible to all
geographies.
Reporting &
Meetings
Weekly or monthly reporting methods, and monthly
steering committee meetings, are used to share
performance results and best practice solutions.
Multi-Functional
Project Teams
These can be a very effective way of driving cross-
functional understanding and communication, and are
essential for many project design and implementation
initiatives. Collaborative project teams with the retailer
customer can also ensure that strategic goals are
aligned.
Word-of-mouth Word-of-mouth - but with no specific PR exercises.
12
IGD 2006
Winning Characteristics
1. Strong customer focus
2. Operational delivery
3. Innovation
'Best-in-class' can represent something slightly different for a retailer (collaborative), a
supplier (brand management) or a service provider (cost effective), but there are also
some distinct similarities across the end-to-end supply chain for a winning business
formula. The companies that came out on top of the IGD international supply chain poll
all show elements of the following key characteristics in their business models:
Finally, IGD's supply chain survey asked companies to choose a best-in-class company -
retailer, supplier and service provider. Amongst others, companies most admired by the
Supply Chain Executives included Tesco and Procter & Gamble. The characteristics
displayed by recognised leading retailers and manufacturers are highlighted in the tables
below:
Use of Continuous Improvement Techniques
Note - companies can choose more than one technique
41%
24%
24%
20%
20%
9%
Business Process Re-engineering
Total Quality Management (TQM)
Lean Methodologies
Six Sigma
Total Productive Maintenance (TPM)
Other
Winning Characteristics for the 'Leading' Retailer
1. Growth (Sales & Profitability)
3. Integrated supply chain
4. Distinct business model
5. Strong collaborative relationships
Winning Characteristics for the 'Leading' Manufacturers
1. Innovative
2. Effective brand management
3. Speed-to-market
4. Excellent customer management
5. Scale and agility of supply chain
1. International Supply Chain Barometer Managing International Supply Chains
13 IGD 2006
1. International Supply Chain Barometer
Summary
A holistic view of supply chain involves both information and product moving from
raw material right through to the end shopper. However, many companies still think
that their sphere of influence stops with delivery to the retailer, whether at the
distribution centre or at the store.
Where there is greater understanding of the inter-dependencies between logistics,
sales and production, companies are starting to challenge more traditional
organisational structures and integrate supply chain functions. The supply chain is
now being seen as a key element in driving competitive advantage, organisational
capability and business integration.
A large proportion of companies are now outsourcing their warehousing and
distribution functions to third party logistics providers. These same companies are
also aware of the complexities of managing a number of different logistics
operators across markets.
Logistics specialists are now offering 'end-to-end' international supply chains
solutions to help retailers and manufacturers improve their total supply chain
visibility and achieve efficiencies through integration, streamlining and improved
real-time data.
The top supply chain challenges for the food and grocery industry includes
accurate demand planning & forecasting; retail packaging; and the management of
new product introductions. On-shelf availability is a key area of focus, and all three
of the above issues can impact significantly on the likelihood of a shopper finding
the product they want, at the time they want it, and in the quantities they want to
buy.
Improving the levels of collaboration between trading partners will be an
important step in meeting those challenges head-on, and delivering the right
service levels, in the most efficient and cost-effective way. Cost and information
management are key challenges for a number of the companies surveyed by IGD
for this report.
14
IGD 2006
Against a backdrop of price deflation, shopper demand for more choice, and varying
customer loyalty, the market for consumer goods is now very much a global
phenomenon and continues to grow at an accelerated pace. In the last ten years, global
trade of consumer goods has leapt from over 5% growth per year to double-digit growth,
as the booming economies of India, Central Europe, and China have joined the more
traditional markets of America, Western Europe and Japan on the world trading stage.
Examples of International Retail Expansion
Carrefour South Korea is set for another 15 new hypermarkets over the next three
years, with three new stores and re-furbishment of existing units planned for
2006.
Metro Could open its first cash n' carry store in Pakistan in early 2007. This would be
Metro's 31st country and its fifth Asian location alongside China, Japan,
Vietnam and India.
Pyaterochka The Russian retailer has acquired another 25 stores, mostly in Moscow, and
also plans to have 30 stores in the Ukraine by the summer of 2006.
Tesco Set to open 20 more stores in Malaysia within the next five years, adding to
their existing ten stores through a joint-venture.
Wal-Mart Reinforced its international presence in Brazil, through an acquisition of 140
stores, bringing their total to 295 and a number three market position.
1.1 IGDs International Survey
Key Points to Note
Collaborative logistics is seen as a key opportunity to find the right balance
between an efficient cost save and time to market.
44 companies contributed to IGDs International Survey.
A broad spectrum of businesses (UK and International) have a vested interest in
international supply chains.
Supply Chain Executives surveyed held a mix of country-specific responsibilities,
through to Regional, European and Global management accountability.
With an increasingly promotion-led marketplace and extended lead-times from global
sourcing, demand variability has increased, but reactivity and flexibility has reduced. The
whole supply chain (retailer and supplier) demands less inventory, and yet on-shelf
availability continues to challenge the industry.
15 IGD 2006
Companies are therefore looking for even greater supply chain efficiencies to support
business sales and growth strategies through excellent customer service. Developing
collaborative logistics is therefore now seen as a key opportunity to find the right balance
between an efficient cost base and time to market.
Consequently, the challenges of managing international supply chains have never been
greater. IGD's new report aims to discuss just some of those challenges, provide a variety
of case-studies and examples of innovative solutions. It will highlight supply chain
complexity with key emerging markets, and share examples of best practice
management across the international food & grocery industry.
1.1.1 IGD Research Methodology
In order to supplement the extensive number of case-studies included in the Managing
International Supply Chains report, IGD carried out an on-line survey of Senior Executives
to provide both a quantitative and qualitative insight into how leading companies
manage their supply chains internationally.
This unique research, conducted in November 2005, explores the facts, beliefs and future
predictions of Senior Managers who are responsible for driving international supply
chain efficiencies.
The following tables indicate the companies and a list of sample job titles that
contributed to IGDs research for this section of the Managing International Supply
Chains report.
Companies Contributing to IGD's Survey Research
ACR Logistics
AJC International Inc.
Allied Domecq Spirits and Wine
ARC Advisory Group
Arc International
Arla Foods (UK) plc
Bacardi-Brown-Forman Brands
Campbells Grocery Products
Carrefour Czech Republic
Colgate Palmolive (UK) Ltd
Cott Beverages Ltd
Diligio Advisers AB
Elizabeth Shaw Ltd
EverNew Int Inc.
ExxonMobil
Freudenberg Household Products
Golden Wonder Ltd
Habitat UK Ltd
HJ Heinz Frozen and Chilled Foods Ltd
HP Foods
Information Resources
KPMG
Kraft International Commerce
Kraft Foods
Lion & Dolphin
Liven SA
Logisys A/S
Lornamead Europe Ltd
Masterfoods
Mondi Hypac
Muller Dairy (UK) Ltd
PIC (part of Sygen International)
Proctor & Gamble
Sara Lee International
SCA
SC Johnson
Seegrid Corp.
SSL International
Unilever
Universal Pictures International
Universitat Autnoma de Barcelona
University of Colorado
Weetabix Ltd
WD Irwin & Sons Ltd
1.1.2 What is Your Business?
In order to understand the range and role of participating companies within the food and
grocery sector, IGD asked respondents to specify their type of business.
The vast majority of respondents classified their company as a Fast-Moving Consumer
Goods (FMCG) supplier with 65.2% of the total responses.
The next largest group was Management Consultancy Firms at 10.9%.
Retailer responses represented 8.7% of replies.
The remainder was made up of logistics service providers, packaging companies and
other specialist producers.
It is perhaps not surprising that IGDs research into international supply chains gained the
most responses from manufacturing companies. These organisations represent the
largest single group within the food and grocery sector. Global operations management
and international manufacturing have long been at the heart of their production and
distribution processes, and this continues to be a growing trend as companies place
strategic importance on driving global branding and scale efficiencies.
In this way, it is often the suppliers who have the most experience in managing supply
chains internationally and the challenges that different markets and cross-border
movements can present. Although this contrasts with the relative few numbers of
retailers with significant international presence, through the variety of international case-
studies in this report, and a share of voice in the survey, it is fair to say that leading
retailers are becoming increasingly adept at using their supply chains as a means of
competitive advantage, and are now often at the very forefront of driving innovation in
supply chain management, from product sourcing right through to the shoppers in-
store experience.
Combined with participation across consultancy firms, logistics, and packaging
companies, the wide response to the survey provides some interesting insight into best
practices and thought leadership in this vital area of operation.
16
IGD 2006
Sample Job Titles Responding to IGD's Research
Director Outbound Logistics W. Europe
European Logistics Director
European Sales Manager
European Supply Chain Director
European Supply Chain Project Manager
Head of Logistics
Head of Planning & Customer Service
Head of Supply Chain
Head of Warehousing and Logistics
International Business Account Manager
International Commercial Manager
International Logistics Manager
International Retail Operations Director
Logistics Director
Manager Global Customer Services
Nordic Sales Director and Category Director
Sales and Marketing Director
Sales Director
Supply Chain Information Manager
Supply Chain Manager
VP Business Development
17 IGD 2006
1.1.3 Which Country Operation(s) Do You Represent?
To ensure a truly international perspective on supply chain challenges within the
industry, the survey asked respondents to highlight the geographic responsibilities of
their role.
The Supply Chain Executives surveyed held a mix of Country-specific responsibilities,
through to Regional, European and even Global management accountability.
Caribbean Ireland
Czech Republic Middle & Far East
Denmark Scandinavia
Europe South America
France Spain
Germany UK
Global USA
Hungary Western Europe
Indian Sub-continent
Key Elements in Supply Chain Management
Product
Information
Raw materials Manufacture Distribution Retailer/Wholesaler Consumer/Shopper
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IGD 2006
1.2 The Supply Chain Overview
Key Points to Note
Many companies still think that their sphere of influence stops with delivery to the
retail customer, whether at the distribution centre or at the store.
There is a growing trend for Sales & Marketing functions to be integrated into the
supply chain structure.
64% of companies surveyed by IGD say that supply chain performance is of high
strategic importance to their company.
Managing the international supply chain as part of a 'global operations' business
model is prevalent amongst many of the leading manufacturing companies.
IGD asked survey participants to define the term supply chain from their companys
perspective. This helps us to understand the role of logistics professionals within the food
and grocery sector, but also the structure of the leading companies. Specifically, IGD was
interested in whether there is a holistic view, or a more compartmentalised view of the
role of supply chain and how it interacts within organisations, and externally with trading
partners.
1.2.1 The Definition
Is it the buy, make, move and sell' functions in the business?
19 IGD 2006
If we consider the above diagram which aims to re-group all of the main links and
elements in the end-to-end supply chain, it is fair to say that no single company was able
to mention all of the individual components explicitly. Either the focus was on product,
with no mention of the importance of information, or the supply chain stopped either at
the retailer (customer) warehouse, store or shelf.
Even when most elements were mentioned, the end shopper who purchases the product
was often excluded from the definition, so that shelf is now synonymous with
shopper:
Scale of Definition Definition of 'supply chain' within each
company
'Text-Book'
"The flow of information and product
between the various parties from raw
materials supplier to customer (retailer)
shelf"
"All activities dealing with information and
physical merchandise flow from
procurement and manufacturing to POS
(point-of-sale)"
In this way, many companies now recognise the importance of on-shelf availability, the
last 50 metres, and the need for an integrated end-to-end view of the role of supply
chain:
company
'Raw material to shelf'
"From inbound factory flows through to
on-shelf availability"
"The ability to get the right product to the
shelf at the right time at the most effective
cost"
Nevertheless, for many companies, the role of their supply chain stops either at the
retailers depot or store, so that the flow of product to the shelf and the shopper remains
the primary role of the retailer:
20
IGD 2006
company
'Stops at store'
"The purchase and delivery of product from
supplier to store"
"A fluid, reliable flow of merchandise going
to the stores"
'Stops at warehouse'
"Total supply process - from
ingredients/packaging procurement to
delivery to customer depot"
"End-to-end process from supply of raw
materials to manufacturing plants to
delivery of product to customer
warehouses"
'Factory-focus'
"Material ordering through demand
forecast and distribution to retail"
"Management of customer
demandmanagement of inventory
forecasts and production levels"
Finally, it was interesting to note:
The importance of equitable trading relationships: The efficient transfer of
information and product to meet customer and supplier requirements.
Organisations expect supply chain initiatives to have more equal consideration of the
needs of both retailer and supplier.
The focus of the trading relationship: Manufacturing through to shelf (executive
level) and forecasting to shelf (focus level with customers).In this example, one of the
key factors in the supplier-customer supply chain relationship is the link between the
demand forecast and on-shelf availability.
Overall, the role of supply chain seems to vary quite considerably from one organisation
to the next, so that where some companies have accepted that their sphere of influence
has moved down the supply chain and into the store environment, others still have a
more traditional view, where supply ends at the back-door.
1.2.2 Which Functions or Departments are Part of Supply Chain?
A holistic view of supply chain can be facilitated by the organisational structure of a
company. IGDs survey sought to understand the current linkages between internal
departments, by asking which functions or departments were considered part of supply
chain.
21 IGD 2006
Strategic Importance of Supply Chain
64%
26%
10%
High
Medium
Low
In response, Purchasing, Manufacturing and Distribution tended to be the most
commonly-cited functions playing a key role in supply chain, highlighting the physical
transformation and movement of product around a business. Sometimes more detail was
provided, to include planning & forecasting, quality, order processing, or logistics &
warehousing.
However, it is equally true to say that those parts of the chain that have been traditionally
considered as more customer-facing, such as Sales & Marketing and Customer Service,
are increasingly being integrated into supply chain. Where in previous times there have
been organisational divides between commercial and distribution roles, alignment
between these sometimes distinct parts of the chain now appears to be widespread.
Nevertheless, there is not complete alignment across all functions, and departments such
as IT, Human Resources and Finance are still viewed very much as support functions
to supply chain, and were mentioned infrequently by companies in the survey.
1.2.3 How Important is Supply chain in Your Companys Strategy?
In a highly competitive and challenging business environment, supply chain can be
viewed as a key weapon in driving competitive advantage. IGDs survey asked whether
supply chain was of high, medium or low strategic importance.
High Importance
Over 64% of responses said that supply chain was considered as being of high
importance in their company strategy. What this actually means in operational terms
varies considerably however from company to company, and may even depend on how
a particular individual interacts within the organisation.
A selection of views is provided in the table below, where inventory management, a focus
on improving on-shelf availability, and cross-departmental training are all key outward
signs of supply chain being considered of high strategic importance.
22
IGD 2006
Views of companies with Supply Chains being of 'Medium' strategic importance
"Not yet walking the talk"
"Supply Chain as a function is beginning to get recognition within the business"
"We have too big an emphasis on manufacturing competencies versus true supply chain
competencies"
"We see the supply chain as an area to achieve efficient implementation of our brand/trade
marketing plans. If we can exploit the supply chain, then the consumer will have more
sustained opportunity to purchase our product"
Views of companies with Supply Chains being of 'High' Strategic Importance
"Fixing empty shelves is a priority and a multi-billion dollar opportunity"
"I have recently run a series of Supply Chain awareness sessions with all staff. The key issue
currently is creating efficient linkages with each of the functions"
"Control of inventory at all stages is vital to cash flow, production efficiencies and customer
service"
"Emphasis is on operational management of a business plan to ensure maximum possible
levels of customer service"
"Supply chain seen as a way to gain competitive edge"
Medium Importance
26% of replies said supply chain was of medium strategic importance. It is interesting to
note here that the main differences between medium and high importance are the
operational practices and the links between parts of the chain. This means that
companies need to have visible signs of the importance of supply chain within the
company for example, real end-to-end processes and cross-functional
interdependencies - for it to be considered by employees as being of high strategic
importance.
Low Importance
In contrast, the remaining 10% of replies believed supply chain was considered as being
of low strategic importance for their company. Whilst it is not surprising to learn that this
group included a number of the management consultancy firms, to whom supply chain
activities per se would be expected to be of low importance, it was somewhat more
surprising to find a number of leading manufacturers who also believed that supply
chain was not considered of high importance in their company strategy.
If there is not a holistic approach to supply chain management, and departments work in
silos across warehousing and distribution, production operations, and sales, then it is
indeed possible for production and sales to be viewed as the primary focus of the
manufacturing company, and that the logistics element is viewed simply as supporting
that primary function.
23 IGD 2006
Where functional inter-dependencies are not explicitly included in organisational design,
and with a growing trend towards the outsourcing of warehousing and distribution to
third party operators the argument being that these activities are indeed non-core
then there is some logic to the view that supply chain cannot subsequently be
considered of high strategic importance.
1.2.4 How is Your Supply Chain Managed?
Companies were asked to explain how their supply chains were managed, whether at a
regional, national or international level, in order to understand both the level of
internationalisation and the degree of supply chain integration.
Organisational Design
41%
35%
24%
International
Regional
National
In response, the majority of companies said their supply chains were managed
internationally, with 41% of respondents, followed by 35% managed at a regional level,
and the smallest number managing their supply chains at a national level, at 24%.
Nevertheless, within this overall view, there are variances, and often the reality is that the
supply chain is managed as a mixture of all three options.
24
IGD 2006
Implications
IGD believes that for many global international organisations, one of the many
challenges in driving scale economies is how to implement cross-border synergies, and
transfer best practice across different markets and operating companies. The
management of supply chain best practice within surveyed companies is discussed
later in this chapter.
Organisational Structure
Type of Design Characteristics Example Organisation
Global Operations
Manufacturing will often be managed at a 'group'
level, thus as part of 'global' operations.
Global manufacturing sites feed multiple regions
and then countries, with shared SKUS, or products.
International teams will manage the purchasing
through to the production part of the supply chain,
whilst the rest of the chain will be managed locally.
The commercial aspects of supplier-retailer
relations will often operate at a more regional
international level, such as Europe, Asia Pacific,
Americas, Rest of World (ROW).
Companies showing elements of this type
of management structure include:
Procter & Gamble
Colgate-Palmolive
Bacardi
SSL International
Unilever.
Regional
International
Some organisations, especially in terms of factory
production and commercial, structure themselves
at a regional international level, for example,
Western Europe.
Masterfoods
National & Regional
For some organisations, mature markets are
managed at a national level, whilst developing
markets are regional.
All divisions report internationally, so that best
practice can be shared across the international
organisation.
Kraft
National
Some companies, despite being part of a large
international group, will still manage their supply
chains autonomously at a country-level,
particularly for secondary deliveries into retailer
premises.
The senior supply chain team will often report into
the international head-office, and will aim to drive
cross-border efficiencies, where appropriate.
Arla
Mller Dairy
Sara Lee International
25 IGD 2006
Case-Study - Unilever, Managing International Supply Chains
Unilever is a leading manufacturer of FMCG, with close to 300,000 employees, brands
on sale in 150 countries, and strong positions in both developed and developing
markets. Within the Home & Personal Care (HPC) division, Unilever products range from
fabric cleaners through to hair/skin care and deodorants, with brands such as Cif, Dove
and Comfort.
Context
Against an industry backdrop of tightening margins in a climate where fixed assets
and working capital are taking a larger proportion of sales, there have been 4 key
drivers for Unilever HPC to consider managing their supply chains on a global or
regional basis, whilst being able to react to individual customer demands at a local
level.
Four Key Drivers
Scale: in supply of materials, manufacturing and distribution.
Speed: in delivery of innovation and responsiveness.
Excellence: in their ability to leverage skills and expertise.
Alignment with the rest of the Unilever business.
Process I - Global Executive Supply Management (GESM)
What?
GESM has created a single point of contact for a material or group of materials. This
contact is empowered to negotiate on price, terms and conditions on behalf of all
regions, categories and brands, thus securing materials supply on a global basis and
developing, maintaining and implementing supply strategies.
Why?
Unilever HPC has introduced a global supply management programme to leverage
their scale with suppliers, avoid bidding against themselves, to develop deeper
understanding and knowledge of the market, to enable global innovation and
simplification and to manage supply constraints more effectively.
How?
Through a defined management structure (made up of a global supply management
director, regional team members, and technology and administrative support teams),
Unilever's GESM uses a combination of strategic and operating frameworks, formal and
informal networks, and processes and systems. The operating framework concentrates
on clear roles and accountabilities, including the decision-making and contractual
frameworks, and a code of business principles, whilst the process and systems includes
people and information management, and project and performance management
techniques.
26
IGD 2006
Results (between 2001 and 2004)
- 85%of global spend was through the executive teams.
- Globally-synergised spend
- Global co-ordination in supply crisis.
- Creation of supply market specialists.
- Executive buying as an enabler of global innovation.
- Large-scale, focused projects with fewer suppliers.
- A consistent information structure.
Process II - Strategy into Action in Manufacturing
What?
The 'Strategy into Action' initiative aims to deploy the global and regional
manufacturing strategies through the organisation and down to the local shop-floor
production environment.
How?
Through a number of critical success factors (CSF), Unilever HPC aims for regional and
local accountability, which drives global capability. Unlocking global economies of
excellence, speeds and scale in the supply chain, Unilever aims to deliver exceptional
top and bottom line growth.
Strategic Deployment
The overall divisional strategy will be split down for both categories and regions, and
then translated into a category and regional supply chain strategy. This can then be
communicated through the Global and Regional Virtual Sites, who play a key role in
deploying the strategy locally through a series of work plans and scorecards.
Unilever Key Learnings
1. Everything flows from the original vision and strategy.
2. Although a challenging process, it is imperative to have clear common key
performance indicators in all territories.
3. Invest time in the operating framework, ensuring clarity of roles and
accountabilities globally, regionally and locally.
4. Processes and information must be aligned to this framework.
5. It is important to invest in developing informal networks and relationships.
Source: Unilever, Feb. 2005/IGD Research, 2006
Unilever HPC Critical Success Factors
Innovation
Delivery
Customer
Service
Excellence
Cash for Growth Corporate
Social
Responsibility
Organisation
and People
Design for
manufacture
Early
equipment
management
Vertical ramp-
up
Output
reliability
Reduced lead-
times
Late variant
additions
(postponement)
Operational
efficiencies
Capacity utilisation
Line speeds
Manufacturing
savings
Waste reduction
Environmental
targets
Employment
policies
Global and
regional virtual
sites (GVS/RVS)
Skills
development
programmes
Source: Unilever HPC, 2005
27 IGD 2006
Case Study - Zaras Vertical Supply Chain
Background
Zara is a fast fashion retailer that has a highly responsive supply chain enabling it to get
new fashions onto the marketplace in a matter of weeks. It is part of a bigger group of
companies owned by Inditex. Inditex has over 2,500 stores across 400 cities in 58
countries generating sales of 66bn. It operates eight independent formats of which
Zara is the dominant format.
During 2005, Inditex opened 323 stores and by 2009 aims to nearly double its total
number of stores to 5000.
Zara is driven by the introduction of new designs. A big selling item may well mean a
store only receives ten of those items. The focus is on selling through, giving an air of
exclusivity about the Zara brand. In turn building up anticipation amongst the
customer on the next exciting new design to come into store.
Zaras model differs from conventional clothing retailers, it more closely emulates a
make to order environment. It allows more stock to be made available during the
season it is sold (in season). This helps to retain higher exit margins with subsequent
'markdowns' close to half the industry average (Source: Zara UK).
Zara Store, Casablanca
Formats No. of Stores
Zara
Kiddy's Class
Pull&Bear
Massimo Dutti
Bershka
Stradivarius
Oysho
Zara Home
816
143
414
356
344
254
139
101
Source: Zara UK, 2006
The most successful store opening in Zara's history was the 20,000 sq.ft. site located on
Henry Street, Dublin. With no formal advertising, anticipation about the impending
store opening spread quickly by word of mouth. Like most of Zara's store openings, all
the directors arrived two days before the opening to unload the garments from the
vehicles and merchandise the stock in store; encouraging feedback from junior staff on
what works and what doesn't.
Confirmed Stock Zara Industry Average
6 month pre-season
Start of season
In season
15-25%
50-60%
40-50%
45-60%
80-100%
0-20%
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IGD 2006
Vertical Supply Chain
Zara operates a unique model in the fashion industry. Its vertically integrated business
undertakes a variety of activities in-house from design, manufacture, sourcing,
distribution to running retail operations.
Clearly, having a significant supply base in Spain is more expensive than sourcing from
Asia - but the increased flexibility of producing to demand is an advantage. This is
particularly true for fast fashion items where over 50% is produced in Spain and 26%
from the rest of Europe. Asia is used more extensively to produce steady or permanent
lines.
All functions of the business continuously work together in teams able to produce new
collections each season, which are updated and completed on a weekly basis,
continuously renewing the fashion offer.
Balancing In-house and External Operations
Source: Zara UK
60%
40% 40%
60%
Inhouse (Zara)
External (Outsourced)
Supply of Fabrics Manufacturing
'Zara even sources the marble for its shop floors from its own quarry'.
Designers
Attend international
fashion events and
create designs.
Stores
Merchandise stock, sell
product and feedback
comments and new
design ideas.
Modelists
Make patterns and
sample garments.
Commercial
Monitor sales patterns
and adapt collections to
the tastes of each
country.
Buyers
Source material and
negotiate with
suppliers.
Distribution
Executives
Manage the available
stock with the orders
required by stores.
29 IGD 2006
The continuous feeding of ideas is a key feature of this chain from store staff inputting
potential design trends to manufacturing extending the length of a sleeve of a
particular garment to more fully reflect the average size of an individual in a country.
As a new product is made available for sale, within 2 hours the manager's feedback the
customer response and identify if it is a good or bad seller.
Zara doesn't mark down its products because if the product is not selling they stop
manufacturing it. They do hold sales, but only within two distinct periods during the
year at the end of Winter and Summer.
Stores order their own stock from an offer they receive twice weekly from the
commercial managers who then have to negotiate the stock for their respective
country of responsibility. Stores are ranked according to level of sales and forecast
accuracy and receive priority orders as a result.
New product is made available to countries after successful trials and is not pushed
onto the stores. Commercial managers pre-warn countries of upcoming styles. Just as
new styles are introduced, Commercial Managers decide the cut-off point when the
product is considered unsuitable. This in turn helps to control the range density in-
store.
Distribution
Nearly all of Inditex stores receive deliveries centrally from Spain. These highly
mechanised distribution centres are dedicated to the individual store formats::
The depot in A Corua is a cross docking facility where most of the stock is shipped
onwards to Zara and not held for long periods on site. This is achieved by the 127km of
moving rails that connects the DC to the manufacturing site on the opposite side of a
road (product moves on rails under the road). Apart from a small warehouse in Mexico,
the A Corua warehouse sends out stock to all of Zara's stores twice a week. Typically
order lead time from factory to store is 1-2 days.
Zara Logstica (A Corua)
Plataforma Europa (Zaragoza)
Tempe (Alicante)
Pull and Bear (Narn, A Corua)
Massimo Dutti, Bershka and Oysho
(Tordera, Barcelona)
Stradivarius (Cabrianes, Barcelona)
30
IGD 2006
All product deliveries are made from the central sites in Spain. For international
deliveries the product is delivered to the border of the country, and the corresponding
logistics provider for that country takes over the distribution to the store.
In Summary
Zara's vertically integrated supply chain supports its fast fashion business model. It
helps to increase the speed to market, getting a new product into store in a matter of
weeks compared to months for a typical competitor. With no advertising costs it relies
on the strength of its offer and the anticipation amongst it customer base to create
awareness and brand recognition. In an environment where discounting is
commonplace, Zara maintains a higher percentage of full price sales.
Controlling all aspects of the supply chain gives it the flexibility to customise the
garment to meet the changing needs of its customers all over the world.
Materials Distribution
31 IGD 2006
1.3 Outsourcing
1.3.1 Penetration of Outsourcing to Third Party Logistics Providers
In organisations where logistics is outsourced, the challenge for the supply chain teams
is how to promote the seamless integration of product movement and supply chain
management across locations, departments, and partner companies, whilst benefiting
from the advantages of not having to manage all of the links in the chain directly
themselves.
To this end, many third-party logistics providers continue to broaden their service
offering, and now aim to manage the whole end-to-end supply chain. The reasoning
behind such initiatives is the ability to improve full supply chain visibility, thus driving
efficiencies, and simplifying both reporting and event management for the customer.
In response to this trend, IGD wanted to gauge the level degree of supply chain
outsourcing that occurs across international markets. For both warehousing activities
and transport movements, the survey asked respondents:
Is the supply chain managed internally, or is it outsourced to a third-party logistics
company?
What volume of goods is managed in-house or via the third-party company?
Do you employ a lead logistics provider - that is to say, a preferred logistics company,
providing extensive services?
Key Points to Note
Seamless supply chain flow is a challenge for many companies operating across
different locations, departments, and countries.
60% of surveyed companies said that their warehousing activities were outsourced
to a third party logistics provider, compared to 70% of companies who outsource
their transport operations.
When supply chain is viewed as a 'non-core' activity, the levels of outsourcing tend
to increase, but few companies have a lead-logistics provider managing their end-
to-end supply chain.
In response to some of these complexities, some organisations are simplifying their
logistics operations by harmonising contracts and reducing the number of
operators used.
32
IGD 2006
Implications
As companies review their supply chain operations, sometimes resulting in the
rationalisation of production and storage activities. With rising cost pressures it is likely
that an increasing number of companies will view warehousing as a 'non-core' activity,
increasing the potential to outsource to a third party company.
For suppliers, this may well mean locating centralised storage, pick and distribution
facilities away from the main production plants.
For some retailers, this will mean more warehousing activities are outsourced, as
they focus on in-store execution and product sourcing initiatives.
The level of integration of third-party logistics companies within the international
supply chain is therefore expected to increase over time.
Warehousing
In terms of warehousing activities, 60% of responses showed that warehousing was
outsourced to third party providers, compared to 40% managed internally by the
company. Of those 60% of companies that outsource their warehousing, 89% of
responses said that this represented 50% or more of their total volumes, whilst 30% said
that this represented all of their warehousing volumes. These results show that
outsourcing is indeed highly prevalent within the warehousing part of the supply chain,
and that when warehouse management is outsourced, it often represents a significant
part of the companys total volume throughput.
In contrast, there are still a large number of companies who still manage their
warehousing internally (40% of replies). In addition to legacy practices, or a strategic
decision to control all parts of the chain, this trend could also be due to the fact that
warehousing is often integrated into the production facility for many manufacturers, and
so it would be difficult to separate the management of these two parts of the chain.
Transport
In contrast, the picture for transport activities is somewhat different. At nearly 70% of
replies, more volume is outsourced and transported by third-party logistics companies,
compared to only 30% of volumes being managed internally on companies' own-fleets.
Of the 70% of companies that outsource their transport movements, over 56% said that
all of their volume was outsourced.
These figures confirm the pivotal role of specialist logistics firms in moving inventory
within the food and grocery sector. When transport is outsourced to a specialist
company, the client delegates all management of the movement of goods. It is due to this
traditional view of the role of logistics firms that many of the sector's leading logistics
companies are now focusing on broadening their service offering with a range of value-
add activities and end-to-end management.
33 IGD 2006
Lead Logistics Providers
Aiming to become 'lead logistics providers' with integrated technology solutions, the
larger logistics firms are moving up the chain towards the store environment, with both
labelling and packing, and 'in-store' replenishment initiatives. Back down the chain, these
companies are aiming to reduce the complexity and challenges of global sourcing and
international freight management.
Expectations and demand for quality integrated logistics services are just as high in more
developing markets, and because of the heightened challenges supply chain
professionals and Third party logistics service providers will be even more focused on
driving efficiencies, reducing costs, and designing and managing more fully-integrated
supply chain solutions.
Some of the leading players in outsourced logistics, such as Exel, have created
organisational structures that are regionally-based, thus concentrating on large
geographical areas and the inter-linkages. This strategy presents growth opportunities in
being able to offer integrated solutions, and simplifying the management of the supply
chain for their customers. Third party logistics service providers, therefore, aim to get
even closer to their customers, ensuring they remain focused on customer requirements.
Some are even considering the prospects of joint inventory ownership and gain-share
arrangements to drive further efficiencies and build stronger business partnerships.
For those companies in IGD's survey who do have a lead logistics provider, the responses
have been split by supply chain management structure, in order to see if there is any
correlation between the way the supply chain is managed (regionally, nationally or
internationally) and the logistics company employed to manage the flow of goods
throughout the supply chain.
Lead Logistics Provider by Supply Chain Management Structure
Regional Management National Management International Management
Baylis x 2
Suederelbe in Germany
"Depends on the country
in which the company
operates"
Frans Maas in Europe
Exel Danzer
A local co-operative of
entrepreneurs (Hungary)
ND Logistics in Europe
Stiller Osbourne Logistics
in the UK
CERT in the UK
Celsius First in the UK x 2
ND Logistics in Czech
Republic x 2
Baylis in the UK
TNT in the UK
Bougheys in the UK
Exel
DHL in the USA
Global Services
DHL
Maersk
Youngs Transport
34
IGD 2006
When a lead logistics provider is used, there is a concentration of companies being cited,
which includes, perhaps unsurprisingly, the international logistics giants of DHL, Exel and
Maersk. Through international integration and consolidation, DHL-Exel being a prime
example, these companies have been at the forefront of moves to offer end-to-end
solutions. IGD believes that this trend can only increase as both suppliers and retailers
continue to internationalise their operations and seek global supply chain solutions.
Implications
In an aim to drive scale efficiencies across markets through improved visibility of
logistics costs, many international companies are now stream-lining their operations
and choosing to reduce the number of divergent contracts and/or the number of
logistics operators in the chain.
A clearer view of costs and comparable key performance indicators will aide
companies understand their real 'cost-to-serve', and for manufacturers, this can
help in the development of service-based pricing initiatives.
For example, if a retailer requires specific value-add services (like labelling), then
there will be greater insight into the real costs that this service will create for the
supplying company, thus helping to protect profitability.
Overall, despite over 40% of responses stating that the supply chain was managed at an
international level, companies often do not have a lead logistics provider. This means that
organisations currently outsource their international supply chains to a variety of
logistics operators. Whilst benefiting from local knowledge, flexibility, and sometimes
cheaper rates, the variety of contracts can also add complexity into the supply chain -
which in itself can increase costs - and can also make inter-company comparison difficult.
Points of difference:
Mller Dairy, which manages its supply chain nationally, outsources all of their
warehousing and transport logistics, but to a wholly-owned subsidiary of the
Mller Group called Culina Logistics.
For secondary deliveries, Arla Foods often delivers direct to store, and this is
managed in-house. However, for deliveries that will go into retailer distribution
centres (RDCs), the vast majority of these are managed ex-Factory Gate, and so the
transport element is managed by the retailer, either by their own fleet, or by a sub-
contractor.
35 IGD 2006
1.4 Supply Chain Challenges
Key Points to Note
Demand Planning & Forecasting, Retail Packaging, and New Product Introductions
are the top three supply chain challenges in IGD's international supply chain
survey.
Collaborative planning between manufacturers and retailers can bring solid
business improvements, particularly when considering the in-store availability
challenge.
Retail Ready Packaging continues to be a hot industry topic, and 2006 will see the
challenges and benefits being further debated.
Other key issues include understanding true cost-to-serve; increasing fuel costs;
and the need for improved management information.
In order to understand the challenges that international supply chains are facing, IGD's
international survey asked companies to highlight:
their main supply chain issues
whether these differed by international market
and also to share their main top three supply chain projects
Whether there are any supply chain issues that have truly global implications can be
debated, but the companies surveyed found the below issues to be of particular
relevance.
1.4.1 What Key Challenges are Facing Supply Chain in Your Area of Operation?
Key Supply Challenges
Challenges Facing Supply Chain Percentage of Replies
i.
ii.
iii.
Demand Planning & Forecasting
Retail Packaging
New Product Introductions
72%
54%
54%
iv.
v.
vi.
vii.
viii.
ix.
Fuel Costs
Availability
Multi-Modal Distribution
Labour Shortages or constraints
Shrinkage
Other
48%
44%
24%
22%
15%
9%
36
IGD 2006
Collaboration
IGD believes that integrated demand planning processes and tools will not only aid
internal operations, but also when used collaboratively, can improve relationships
between supply chain partners.
In this way, the following case-study illustrates an end-to-end supply chain initiative,
with particular focus on in-store implementation and product availability, and how
through working together the supplier and retailer can unlock both sales growth and
improved business relationships.
i. Demand Planning and Forecasting
Clearly, the biggest supply chain challenge facing the international supply chain, with
72% of replies, is demand planning and forecasting. With two thirds of respondents
being FMCG suppliers, the ability to accurately plan and forecast demand is the number
one issue for manufacturers within the food and grocery industry.
Improvements in this area would help ensure production targets, service levels, and
availability targets are consistently met. Specifically, effective demand planning for short
shelf-life products in highly promotion-led categories proves particularly challenging,
and with promotions being increasingly used as a key competitive tool, then successful
event and promotional planning and forecasting can make a real difference to the
success of any initiative.
Taking a more holistic view of the supply chain can facilitate improved planning and
forecasting. This can come about though closer working relationships and a greater
understanding of the impact of one decision on other parts of the chain.
Sales managers should know that over-forecasting brings additional stocks into the
business, and hence increased storage, shrinkage and write-off costs for unusable
items.
Merchandisers should know that the over-ordering of products leads to greater
volumes of sale discount or mark-downs.
Whilst supplier managers should know that the over-production of one product can
lead to higher stocks of what you do not want to sell, yet lower stocks of what you do
want to sell.
Amplification of changes in demand - termed the bull-whip effect - can have knock-on
effects in the supply chain. Whilst demand at the retailers till may be relatively constant,
replenishment ordering in full truck-loads, minimum batch/order quantities, the mis-
receipt of deliveries, additional ordering due to unreliable supply, and poor in-store
implementation and compliance can all distort real shopper demand. This often
translates into huge peaks and troughs in demand placed further back into the supply
chain.
This demand fluctuation can create uncertainty in the chain, which can impact on
capacity and inventory levels. This pressure on space and handling efficiencies
subsequently affects productivity and shrinkage. Perhaps even more importantly,
incorrect demand forecasting and demand can adversely affect sales targets and
profitability.
37 IGD 2006
Case Study - Superquinn & Coca-Cola HBC (Ireland)
Availability for Impulse - Collaborating to deliver 30%
growth in category sales
Superquinn and Coca-Cola HBC were among six companies brought together by ECR
Ireland to work at improving on-shelf availability in the Republic of Ireland. IGD, with
experience of running similar programmes in the UK, organised and facilitated the
end-to-end project.
Retailer-Supplier pairings were pulled out of the hat and cross-functional teams were
put together from Logistics, Category Management, Store Management and
Commercial. An ambitious pace of business improvement and personal development
was maintained through regular reporting back on progress, measures and results to
the other project teams, company sponsor directors and IGD facilitators.
Phase 1: Measure and Understand
On-shelf availability (OSA) needs to be measured and analysed to avoid action or
non-action - being based on myth or gut-feel alone. The first set of data gathered by
Superquinn and Coca-Cola HBC showed good availability, but major opportunities
came to light when more thorough analysis was undertaken.
At first internal Not-Available-For-Sale audits completed three times a day, over a two-
week period, and across four locations gave 98% OSA. At this point, there was a high
likelihood that Superquinn and Coca-Cola HBC could have walked away from the
project after this first analysis, if they had not had the prospect of having to report their
findings to other project teams, sponsor directors and IGD facilitators.
The Learning Programme Project Plan
Web-based reference material
On-Boarding meeting 01/02/05
Measure and understand 1
Priority meeting 01/03/05
Measure and understand 2
Progress meeting 30/03/05
Redesign and pilot
Progress meeting 02/06/05
Roll-out and sustain
Evaluation meeting 27/07/05
Jan Feb Mar Apr May Jun Jul
38
IGD 2006
Results from initial analysis
Store EPOS sales by SKU by day were then tracked for two weeks using lost sales
analysis. Whilst this revealed a Take Home OSA of 94% and a Multi-packs OSA of 94%,
Impulse lines and New Items recorded an OSA of only 80% and 71% respectively!
Independent audits across thirteen stores and the top twenty Impulse SKUs gave an
even lower Impulse OSA of 77%.
The project team at Superquinn and Coca-Cola decided to focus on Impulse because
of the very high level of lost sales and their high margin.
Project Definitions
The team defined Impulse as chilled immediate consumption beverages across
carbonated soft drink, juice, water, energy and sports.
The definition of OSA included all placements for each key consumer occasion:
Main Shop, On the Go and With Food.
Further analysis revealed inconsistencies in the number of SKUs listed per store (e.g.
ranging from 8 to 49) with some stores not stocking any of the top ten lines due to
space allocation and lack of planogram compliance. Superquinn had given the
category lower than average category space and consequently had the lowest Impulse
mix of business versus their competitors.
Objective
To develop and implement a comprehensive impulse activation plan which will
maximise On Shelf Availability for each of the core consumer occasions.
Phase 2: Redesign and Pilot
The emphasis here was to develop and test solutions locally, achieve early wins,
motivate others, and learn by doing:
Six test stores were selected, representing a cross-section of Superquinn shopper
occasion mixes.
Across the trial stores, the Impulse range was rationalised to ensure listing of the
top selling SKUs, maximise availability and increase consumer satisfaction.
Assets were audited and planograms developed accordingly.
An Impulse Planogram Champion was identified in each store to raise any range
and planogram compliance issues with head office and suppliers.
Performance Measurement
The success of the project will be measured against the following criteria:
Impulse mix within category from 5% to 11%
Planogram compliance from 61% to 95%
DC stock holding down to 10 days
On-Shelf Availability from 77% to 98%
Impulse category sales growth by 25%
39 IGD 2006
Impulse Beverage Centres were created as part of the Main Shop pattern. All
suppliers were involved so all available assets from the total industry could be
employed to generate early returns in 2005. The alternative was to design ideal
solutions for Superquinn, put assets on order, but wait until 2006 for a return.
Space allocated to Impulse Soft Drinks across all stores was reviewed with each Store
Manager. This increased the opportunity to purchase a chilled soft drink in store With
Food and increase basket size for consumers purchasing food-to-go. Assets were also
placed in the On The Go shopping path, for example near delicatessen counters, at the
checkouts, and near the kiosk area.
Superquinn Stores
Source: IGD Research 2006
In-Store Equipment
Source: IGD Research
On The Go Sandwich Unit
In-Store Locations
On The Go Hot Food
Counter Unit
Checkouts Kiosk
40
IGD 2006
Phase 3: Roll-out and Sustain
The approach taken in the trial stores and the lessons learnt were rolled out to all
stores. Planogram compliance audits were undertaken every six weeks, OSA audits
every eight weeks and range reviews every twelve weeks.
The range was reduced by 100% and aligned with the market coverage, which reduced
off- sales and increased consumer satisfaction. Stockholding has been adversely
impacted, however, by a move to full pallet ordering, especially on new lines. Attention
is to be paid to adjusting thresholds for ordering full pallet quantities and changing to
layer ordering for new lines.
All Shops achieved OSA above 92%. The trial stores achieved 100% availability. Trial
stores over-performed due to increased focus, communication and education. These
fundamentals continue to be delivered to all stores to maximise availability.
There was a proved direct correlation between planogram compliance and increased
sales. The above work has grown the impulse category by 30% in Superquinn. This is
50% higher than the category growth across all supermarkets.
Key Learnings
Beyond the improved business results already summarised, the Superquinn and Coca-
Cola HBC team highlighted the following benefits from engaging in the structured
collaborative learning programme:
Open and honest dialogue and great cross-company team working.
Whole process perspective of product demand and supply chain.
Discovering quick and simple wins that would only be found through dialogue.
Bias for action: by piloting a solution quickly to generate immediate wins, rather
than waiting for an ideal solution.
Better understanding of each business at head office and local level.
Additional opportunities identified and dialogue progressing.
Results versus Target
Impulse mix within category
Planogram compliance
DC stock holding
On-Shelf Availability
Impulse category sales growth
from 5% to 11%
from 61% to 95%
down to 10 days
from 77% to 98%
by 25%
10%
85%
WIP
93%
30%
Source: IGD Research
41 IGD 2006
ii. Retail Packaging
With 54% of replies, retail packaging continues to be a top of mind supply chain issue
for the food and grocery sector, as some of the major international and market leading
retailers focus on ways to streamline the in-store replenishment process. In recent IGD
research, better on-shelf availability is number one on the wish lists of shoppers, ahead of
shorter queues and products being easier to find (IGD Research, 2005). Retail packaging
is not only about the in-store experience though, and organisations are also investigating
how they can influence and improve the flow of product and packaging solutions
through the distribution network.
RRP Applications
Aldi RRP transit solutions Tesco
ECR UK published its first Blue Book on Retail Ready Packaging (RRP) entitled Retail
Ready Packaging Getting Started on the RRP Journey in July 2005, with both Tesco
and Unilever at the leading-edge of this initiative in the UK. After helping define the term
RRP, ECR UK is now working on developing guidelines and standards for branding and
symbols, amongst other attributes, to help ensure co-ordination between various retailer
demands, and the ability of international manufacturers to respond accordingly. At a
European level, Carrefour and Metro have also started to make moves in this area, and
ECR Europe has formed a Workgroup to co-ordinate the various national initiatives.
iii. New Product Introductions
New product introductions (NPI) also prove to be a key supply chain challenge, and
equally received 54% of survey replies. Recent work within ECR UK on the subject of
availability and new product introductions in Availability 2005 Closer to the Shelf -
highlighted the need for joint retailer- manufacturer business planning, and especially
the need to review the success of the implementation.
With up to a third of products changing, or churning, every single year, it is imperative for
organisations to ensure that the associated investment is adding shopper value, and that
new products are reaching the shelf in-time, and in the right quantities, and at the right
distribution. The level of discussion and agreement between retailers and suppliers on an
NPI forecast can vary considerably, as can the level of detail of the forecast.
42
IGD 2006
Process Flow at Each Stage of Implementing NPI to Store
Source: ECR UK, 2005
Planning
Aligning Retailer &
Supplier Join
Objectives
Forecasting
Developed for both
phase out of old
product and phase
in NPI
Phase in Execution
order, deliveries &
merchandising
Phase Out
Execution
Mark down &
clearance
Review
(KPIs, exceptions)
Often linked to the issues associated with NPI, some companies mention the challenges
of discontinued lines. In this way, ECR UK advised that a clear exit strategy for end-of-line
products can be highly influential on the success of the implementation of the new line.
There are many options that need to be considered for an effective phase-out process,
including local versus central decision-making, whether mark down is prior or post NPI
launch, and whether the supplier takes the costs, or these are shared with the retailer.
iv. Cost-to-Serve Initiatives
The difficulty in attributing costs to a varied product portfolio, have been cited as an area
that continues to challenges suppliers, both large and small. In addition to specific
product attributes, the quantity and frequency of order replenishment for different retail
customers can have a significant effect on supplier operational costs, especially full-pallet
picking versus layer or single-picking.
It is important for suppliers to understand the real costs associated with servicing a given
customer, so that the accounts true profitability can be accurately accounted and
reflected in further commercial discussions.
v. Fuel
Over the last year in particular, the increases in the price of fuel, due to capacity issues and
security of supply, have increased the costs of doing business for many organisations.
Almost 50% of survey replies cited fuel costs as a supply chain issue for their organisation.
It is expected that fuel costs will continue to be a burden on organisations for the
foreseeable future.
When combined with skilled labour shortages in some markets, IGD maintains that
initiatives which focus on even greater distribution efficiencies will become increasingly
important.
43 IGD 2006
vi. Internal Relationship Management
It is important for organisations to create the right internal relationships, both within
departments and cross-functionally, in order to ensure the organisation is truly focused
on supplying not only the customer, but also the shopper. After all, in strategic terms,
operational capability can only come about if a business is managed as a joined-up set
of supply chain processes. Within this view, departments run as silos, concentrating on
their own goals, ignore the impact they have on the efficiency of their internal customers
within their own organisation, and the ultimate consequences for the external customer.
vii. Management Information
The ability to transform data into business critical management information in a real-
time environment also continues to challenge some organisations. As supply chain
visibility improves, through both physical integration and system tools, and more data
becomes available, it is important for companies to be able to access and interpret that
information quickly and simply, so that action can be taken when required, in a timely
fashion.
At the operational level, the role of the logistics team in providing information should not
be underestimated, particularly when outsourced to a third-party logistics provider. In
addition to information on the geographical flows, the optimisation of payload (vehicle
fill-rates), costs per square metre, and assistance with identifying inefficient or non-cost-
effective deliveries, the logistics operator can also provide information on the suppliers
loading performance, and the receiving retail warehouse performance. There are even
examples where waiting time is a key performance indicator for staff reward.
Queuing, whether at collection or delivery points, is often considered the single greatest
waste in the transport sector. As penned by R. Boughton in 2003, vehicles should not be
viewed as low-cost warehousing on wheels, and so reductions in delays and queuing
should be of primary focus for supply chain managers. Conversely, the reliability of the
transport carrier in being able to meet their designated delivery window is also a key
performance indicator that should be readily monitored and managed by the warehouse
teams, in addition to the cleanliness of the vehicle and the available space.
viii Shrinkage
Whilst supply chain shrinkage as a key supply chain issue only accounts for 15% of
survey replies, other supplier companies quote high levels of claims from retailers for
over and under deliveries into their receiving depots. The supplier often finds it is unable
to prove the contrary, but believes that these discrepancies are due to mis-counting at
the receiving depot, as opposed to real delivery errors.
44
IGD 2006
In ECR terms, this type of loss would be considered as shrinkage, and could be tackled in
a pro-active way by walking the chain and identifying process gaps. Solutions could
include improved retail packaging, clearer paperwork, or even rounded order quantities,
so that full layers and/or full pallets are delivered, thus reducing the opportunity for mis-
picking at the supplier, and mis-counting at the retailer depot. ECR Europes survey into
supply chain stock loss in 2004 cites process failure as the single largest reason for
shrinkage in the FMCG sector. (source: Shrinkage in Europe: A Survey of stock loss in the
FMCG sector, 2004).
For further details of ECR UK activities, and free downloads of any Blue Book best practice
guide, see (www.igd.com/ecr).
2. Supply Chain Optimisation Managing International Supply Chains
45 IGD 2006
2. Supply Chain Optimisation
Summary
Pressures for greater supply chain optimisation include global sourcing, increased
promotional activity, price sensitivity and cost pressures. Companies are
responding through a variety of supply chain initiatives to help maintain total
costs, service levels, availability and accurate demand planning.
Traditional methods of driving logistics efficiencies, such as tariff management, full-
load deliveries and competitive tendering, now combine with cross-docking,
consolidation, and leading-edge technologies to create a significant business
improvement tool-kit.
Whilst some companies are moving into large-scale centralised distribution parks,
that will sometimes service several countries from one single location, others are
selling off their warehousing assets, and then leasing them back, thereby reducing
capital commitments and injecting cash into the business.
Warehouse automation continues to prove that technology can bring significant
operational benefits for some companies. Other new technologies like RFID/EPC
and the benefits of Global Data Synchronisation remain industry talking points, but
there are still a number of challenges that continue to limit widespread adoption.
Transport costs account for a significant proportion of total supply chain costs, and
these are being challenged across many international markets by fuel cost
increases, legislative changes, road tolls and a lack of investment in transport
infrastructure.
Factory-gate collections and cross-docking practices are becoming more
widespread, as retailers in particular understand the real benefits of increased
inbound cost visibility, and the opportunities for integrating transport fleets.
Inter-modal activity is on the increase across Europe in particular, as more and more
companies look to move freight back onto the rail and canal networks. There is also
a growing trend for short-distance sea-shipping. Logistics service providers want to
capitalise on improvements in these linkages to offer full end-to-end supply chain
solutions.
Subsequently, in the continued quest for end-to-end international supply chain
efficiencies, companies are now employing a catalogue of warehousing and transport
solutions sets, in addition to the more traditional methods.
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IGD 2006
When the supply chain is performing well, it is delivering the best service levels at an
efficient cost. This has often been achieved through regularly tendering for new tariffs,
delivering full loads, holding safety stocks and implementing operational excellence
initiatives. But a number of factors have been impacting on the supply chain, adding
extra complexity and increasing pressure on costs, service, availability and the need to
accurately plan and forecast demand.
Pressures for Greater Supply Chain Efficiency
More Promotions
Global Sourcing &
Longer Lead-Times
Price Sensitivity
Fuel Costs
Congestion
Retail
Packaging
Skilled
Labour
Shortages
New Product
Introductions
Costs
Service Levels
Availability
Demand
Planning
Solution Sets
Then Now
Tariff Management
Full Load deliveries
Safety Stocks
More Frequent Deliveries
Routing efficiencies
Competitive Tendering
Centralised Distribution Hubs
Warehousing Sale & Lease-Back
Consolidation & Shared User Initiatives
Vendor-Managed Inventory
Cross-Docking & Factory-Gate collections
Increased use of Technology
One of the responses to these pressures has been a trend for more frequent deliveries
from suppliers to retailers, and onward into stores. But this solution also impacts on costs
in terms of more transport, reduced order sizes and increased picking activities. In
addition, there are concerns over the environmental impact of a growing number of
trucks on already congested road networks, skilled-labour shortages, increasing fuel
costs, and heightened price-competition in the marketplace.
47 IGD 2006
2.1 Optimisation Through Warehousing
Key Focus - Distribution Parks
The world's largest provider of larger warehouse facilities - US-based ProLogis has
been at the forefront of these trends. The Chanteloup industrial park at Moissy-
Cramayel on the outskirts of Paris is a prime example. Due for completion in three
years it is estimated to be the size of approximately 350 football pitches, it will house
eleven warehouses offering a total of 280,000 square metres of space. One warehouse
is already expected to be used by Danone, the food manufacturer, to distribute across
France.
In terms of warehousing, there have been high levels of focus on reducing warehousing
space and facilities, inventory, and administrative costs. Solutions include: consolidation,
systems investments, distribution centralisation, inventory reduction, and financial tools
to reduce fixed capital investment.
2.1.1 Centralised Distribution Hubs
The location of warehousing facilities impacts considerably on costs, time, fuel, vehicle
routing, inventory levels, and staffing. As such, location will be a major consideration in
supply chain business strategy, aiming to maintain both flexibility and customer-focused
performance. Despite a growing preference for more regional distribution centres, where
return vehicle trips can be made in one day, and more than one location can be serviced;
there has equally been a growth in the use of centralised distribution hubs, some of
which will serve several countries. In an increasingly-complex business environment,
both retailers and suppliers are rationalising their distribution networks and driving
stocks through fewer, but often larger, warehouses.
Key Points to Note
There is a growing trend for new, state-of-the art large-scale warehousing facilities,
which will sometimes service entire countries from a single geographic location.
There have been many recent reports of companies around the world selling off
their warehousing facilities to generate additional cash, and then leasing facilities
back from the new owners.
Businesses have an overall aim to reduce inventory, and improve service levels;
inventory consolidation and shared-user initiatives are increasingly common
particularly for relatively slow-moving ambient product lines.
Case-Study - Mattel, European Distribution
The Business
Mattel is the world's number one toy manufacturer, with brands such as Barbie,
Matchbox, Fisher-Price and Scrabble. Despite a highly seasonal business, where
volumes increase 50% in 90 days towards the end-of-year celebrations, the business
does vary by country, in terms of: order types and drop sizes, lead-times, returns
policies, delivery windows, pallet management and the holiday seasons.
In response to this market, Mattel has restructured its logistics network, by reducing
the number of distribution centres, defining an outsourcing strategy, whilst
maintaining a European-level logistics process.
As for the product itself, there are less than 2,000 skus, but these are fashion-driven and
so there are not so many slow-moving lines; the products are imported largely from
the Far East, which impacts on lead-times; and logistics costs are sensitive to road-
transport variables.
The Choice
The choice of network structure can seem relatively simple:
In reality, the options are much more complex:
Will all warehouses carry the entire sku range, both European and Asian
production?
Will warehouses have specific functions e.g. centralised parcel deliveries?
A
d
v
a
n
t
a
g
e
s
Decentralised distribution
in each key market
Regional distribution Centralised distribution
across the whole of Europe
Quicker lead-times for
bulkier lines, customised to
each market needs, clearer
accountability, and
flexibility in delivery.
Gain the best of
decentralised and
centralised distribution by
creating distribution
clusters based on cultural
and market similarities.
Greater inventory and fixed
costs synergies, greater
control and enables
business focus.
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IGD 2006
Of course, gaining planning permission for such large developments is not always a
simple process, particularly when using green-field sites. The environmental credentials
of any such development are therefore of high importance, and these could be in terms
of newly-planted woodland, solar panels on the roofs, landscaping and even the
collection and re-use of rainwater.
The challenge of finding appropriate locations for warehouse facilities in the densely-
populated urban centres has led companies like ProLogis to provide innovative solutions,
and in urban Japan, for example, urban warehouses can be built several storeys high.
49 IGD 2006
Will inventory be split based on sales velocity e.g. centralised slow-moving goods
warehouses?
The final choice will be driven by the nature of the business, including centre of gravity,
lead-time requirements, parcel vs. full load ratios, and tolerance to crisis and
contingency options (e.g. fire and labour strike). Company culture will also play a part.
The Results
Between 1997 and 2000, Mattel Toys Europe moved from a decentralised supply chain
network to a regional supply chain network, reducing the number of distribution
locations from circa 15 to only four sites with some platforms in Eastern Europe. The
four key facilities, which service other regions of Europe include: Daventry (UK -
Wincanton), Oss (Benelux & Scandinavia - Norbert Dentrassangle), Lyon (France &
Spain and Portugal - Norbert Dentrassangle), and Ollegio (Italy - Mattel). It is important
to note that the inventories were not merged and are not shared. Stock is committed
to one country.
In terms of the wider supply chain, where many business processes in the past were all
managed at a local level, these moved to more regional/global management, including
service procurement, IT support, strategic planning, and the management of the DC's
and transport, whilst forecasting and sales administration moved to local management
with global and regional guidelines.
Benefits of Regionalisation
Control and transparency in cost, service and cash (inventory reductions)
A focus on investment in modern distribution centres with new technology
An ability to attract talent into the organisation
Allows the business to concentrate on its core activities
Mattel Learnings
KPI's and consolidated processes are needed before the change
It is important to select the right team of people and business partners, as the
change process can be challenging
Speed of implementation is important, as the priorities change
Assumptions will change throughout the project, so 'what if' scenarios are
important
Consider the benefits of outsourcing
It is not only about closing and opening distribution centres, but about multi-
cultural communication, aligning business processes, creating and organising a
pan-European team, and having European-level systems and KPI's
Do not underestimate the impact of seasonal volume increases, which can require
temporary warehousing solutions, and can impact on service levels
In order to ensure a cohesive plan, it is important to have a structured approach,
where the base-case scenario is validated by operational specialists, and to ensure
that people do not renegade on the original objectives of the project
Source: Mattel, 2005/IGD Research, 2006
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2.1.2 Warehouse 'Sale and Lease-Back' Schemes
Whilst sale and lease-back schemes for retail stores are common place, this has been a
growing trend within supply chain. The process involves companies selling their portfolio
of property assets, which can represent significant value, particularly in high-cost
property markets, and then leasing them back off the holding company. This allows
companies to release capital back into the core business to fund significant business
improvement and change initiatives, and can impact on overall profitability measures,
not least by reducing debt.
Key Focus - Sale and Lease-Back
Casino Groupe, France
Casino Groupe in France has announced plans to sell 13 warehouses, covering a total
of 418,000 sq. m. to a real estate business for 201.5m pre-tax. Once the deal is
completed during the first-half of 2006, twelve of the warehouses are being leased
back by Easydis, Casino's wholly-owned logistics company. It has been announced that
the sale will allow a cut in net debt of 188m and have a positive impact on profit.
Woolworths, Australia
Woolworths has been reported as selling 11 large-scale distribution facilities worth
approximately $850m. The aim of this initiative is to minimise costs, and not necessarily
maximise the selling price. Woolworths is interested in the attracting the lowest
possible rent from the future owner (s), whilst maintaining operational control.
Karstadt, Germany
Karstadt has announced plans to sell more than 400m worth of real estate, consisting
mainly of distribution centres, in addition to the sale of nearly half of its stores. As part
of a re-structuring programme designed to rescue one of Europe's largest
department-store chains and eliminate the company's debt levels in 2006, Karstadt
has been using sale and lease-back initiatives as a key mechanism in combating its
difficulties. By the end of 2005, the company hopes to have already reduced its debt to
2.8bn from 4.3bn in September 2005.
2.1.3 Consolidation and Shared-User Initiatives
Another increasingly common trend has been the growth in the number of shared-user
warehouse schemes, where product from several manufacturers is housed at the same
facility. The enthusiasm for this type of collaboration in the primary network is born from
a desire to reduce total inventory levels, reduce the number of less-than-full truck loads
being delivered into a particular retailer's warehouse (thus improving productivity),
whilst improving service levels to stores and gaining better on-shelf availability for the
shopper. In this way, through working collaboratively, a number of companies have
achieved significant business benefits from consolidating, or pooling, stocks into one
shared warehouse.
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Case Study - Carrefour, France, 'Pooling'
The Business
Carrefour is the number one retailer in France and Europe, and is the number two
retailer worldwide, with over 11,600 stores in 31 countries across various formats:
Hypermarket, Supermarket, Cash & Carry, Discount and Convenience. By moving from
a stock management strategy to a flow management strategy, which incorporates
both primary supplier networks and secondary store deliveries, Carrefour seeks to
create value by maximising shelf availability.
In this way, the Consolidation, or Pooling, of products has offered Carrefour the greatest
opportunities for increased supply chain efficiencies. Creating value along the total
chain, bringing business process improvements, and having a number of methods of
implementation, pooling has been implemented by Carrefour in a number of
countries, including France, Poland and China (see Chapter 3).
Context
Two suppliers (Vania and Henkel) are using the same pre-existing warehouse, which is
managed by TNT. Vania delivered once every two weeks and Henkel 1.5 times per
week, and so deliveries were not full truck loads and there was too much inventory in
the supply chain.
Aim
To reduce supply chain costs to enhance the product price and improve availability for
the shopper.
Process
Deliveries are combined on trucks going into Carrefour regional distribution centres.
An agreement on the pallet split by truck for each Regional Distribution Centre (RDC),
and any change is communicated and agreed by email between the two suppliers.
Pilot Phase Benefits (across two RDC's in April 2004 and 3 more RDC's in July 2004):
Service levels were above 99% and better than the average
Stock levels reduced by 20%
Full truck load rate moved from 79% to 98%, having a positive impact on transport
and unloading costs
There was a higher delivery frequency, moving to two deliveries per week.
The speed to shelf improved by three to six days
Roll Out (from 2005 onwards)
Deployment to all RDC's and plans to add another supplier into the pooling process
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Carrefour's Key Learnings on Pooling:
1. Internal organisational collaboration is a pre-requisite for this type of initiative,
where both commercial and supply chain teams need to have knowledge of the
process and the benefits, and that the buying team is fully on-board.
2. In this way, supplier consolidation initiatives involve all supply chain parties
(retailer, supplier and logistics provider). Local resistance from suppliers may
require some time in negotiations, and the logistics service provider plays a key role
in facilitating the implementation and process management. Although there can
be an initial reduction in revenues for the service provider, and an element of win-
lose for the supplier, there are longer-term benefits to be gained.
3. For all parties, the importance of the planning and preparation phase of the
initiative should not be under-estimated.
4. Consolidation can offer many efficiency gains, including reductions in supply chain
inventory, driving down the full supply chain costs for the supplier and retailer, and
enhancing shopper satisfaction through improving on-shelf availability.
5. The pooling of suppliers can bring positive results in various markets, from mature
markets (France) through to new and emerging markets (Poland and China). It can
be somewhat easier to implement in emerging markets, because lower volumes
allow for changes in process, and the distribution network is less developed.
Pooling can take longer to develop and implement in more mature markets.
Source: Carrefour, Oct. 2005/IGD Research, 2006
Case Study- Gruppo PAM and Number 1 Logistics Group, Italy
The Businesses
Gruppo PAM, an Italian retailer, has over 850 outlets with a turnover of over 3.7bn, and
operates across various formats: Hypermarket, Supermarket, Franchising and Discount,
including PAM, Supral, Panorama and iN's Mercato.
Number 1 Logistics Group is a leader in the food & grocery logistics market,
specialising in shelf-life management, traceability and recall processes, has 30 self-
managed sites, and generated a turnover of 277m in 2004.
Context
Italy is a highly-fragmented retail market, with the top five retailers having only 30% of
the market, compared to over 70% in France, Germany and the UK, and over 600
distribution centres across the country. The lower power-base of the retailer contrasts
markedly with the vendors, where higher concentration is seen by 50% of retailers
using only three buying groups.
53 IGD 2006
In response to these dynamics and the challenges of less-than-full truck deliveries,
logistics firm Number 1 Logistics Group - a spin-off from Barilla - has been at the
forefront of a consolidation initiative in Italy through their 'efficient delivery system'
called SYNCHRO club. This is not a Vendor-Managed Inventory (VMI) initiative, but is
based on consolidated direct deliveries into the retailer distribution centres through a
central warehouse managed by Number 1 Logistics Group.
Aim
To reduce the transport flows, reduce costs, and improve service levels by changing the
replenishment method into the retailer DC's, through consolidating suppliers and
treating them as one single 'macro' supplier.
Process
4 PAM DC's - Venice, Milan, Florence and Rome, with one delivery per week for the
two smallest warehouses, and two deliveries per week for the two largest sites. The
hub in Milan holds ten suppliers.
A fast delivery lane with fixed delivery windows, with a pallet exchange system.
An Open-book approach between Number 1 and PAM, with benefit share of
transport savings.
An alignment, if possible, of all supplier delivery dates into the retailer DC, but with
no change in delivery frequency or required quantities. Emergency deliveries are
still allowed.
Benefits
Service-level improvements, with on-time deliveries improving from 93% to 98%.
Inbound traffic from Number 1 into PAM's distribution centres has halved.
Average transport cost saving of 12% (range 5% to 15%).
Stronger relationships between supply chain partners.
Number 1 now rolling out to over 30 retailer DC's.
Source: Gruppo PAM/Number 1 Logistics, 2005/IGD Research, 2006
Source: Number 1 Logistics Group, 2005
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Key Focus - Reckitt Benckiser France, Shared-User Networks
Reckitt Benckiser has been carrying out multi-pick distribution in France, through two
manufacturers delivering into retailer distribution centres together. Although this
initiative is helping drive supply chain efficiencies, overall supply chain costs were still
viewed as increasing. There is also the added administrative workload and complexity
of multi-pick, and the company reported no clear visibility of improvement in on-shelf
availability.
Subsequently, Reckitt Benckiser has taken the collaborative approach one step further
through a shared-user site initiative, and this has shown that overall supply chain costs
can be at least maintained. The company believes that any decision to pool resources
requires high-level principle agreement, engagement over several years, and a two-
step process, moving from partial volume transfer to full transfer.
In order to choose the right partner, the products should be complementary (but not
necessarily direct competitors), existing relationships need to be strong, and there
needs to be an over-arching desire to be pro-active.
Source: Reckitt Benckiser, 2005/IGD Research, 2006
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2.2 Technology in Supply Chain
2.2.1 Automation and Automated Distribution Centres
Although automated processes have been used within logistics facilities for several
decades, it is only in recent times that large-scale highly-automated distribution centres
have become a reality across the industry. The main reasons for choosing this type of hi-
tech solution are generally because of high land costs and/or high labour costs, and so
there are more examples in Europe (particularly the UK, Germany and Belgium) than in
Asia or the Americas, where the costs of both land and labour have tended to be lower. It
is true to say that demand for automated facilities is particularly prevalent amongst fast-
moving consumer goods (FMCG) manufacturers and retailers.
The costs of any large-scale automation project are not to be under-estimated, and could
typically reach 30 to 50 million for a single site initiative. This would include:
land acquisition
building construction
the commissioning and installation of the automated equipment
Before embarking on an automated facilities strategy, companies need to:
ensure that size and market position justify the expenditure
the solution is flexible enough to respond to changing markets demands
the market opportunities are long-term in a stable environment
As such, it is not unreasonable to envisage a 10 to 15 year time horizon.
Key Points to Note
Where products are fast-moving and labour costs are high, companies continue to
investigate the productivity benefits of large-scale warehouse automation. The
process is complex, and the investment significant, and so businesses must ensure
long-term market stability.
Whilst the opportunities that RFID/EPC technology offers the industry are
significant, there are still a number of equally important obstacles to widespread
implementation, not least the ability to create a solid business case for the large-
scale investment.
The sharing of accurate product data between trading partners could offer
significant business benefits, including sales and productivity gains.
In order to justify this level of fixed asset investment, the company must generate high
enough order volumes for automation to really generate the labour cost savings, hence
the prevalence in the FMCG sector. One leading service provider has suggested 400,000
pallets a year for a manufacturer, and one million cases a week for a retailer, depending
on the business complexity and the order structure.
The Process
Analysis
Business information, assumptions and projections are analysed and
tested to establish an appropriate solution that matches the user's needs.
Through simulation modelling systems, data and order structures are
examined to ensure that the volumes can yield significant margin savings
through an automated-handling solution.
It is vital that certain criteria are established before any solution is
established, including: order structure, lead-times, delivery profiles (week,
month and year), contracted service levels and quality, and any growth
assumptions.
Pre-Requisite
One key element of any eventual automated warehouse solution is the
core warehouse management system, which will act as the 'nerve-centre'
of every automated process within the facility, and will be integrated with
each specialist piece of equipment.
In order to ensure success, testing often occurs before equipment is
brought to the site, off-line as a fully-integrated system, and then finally
on-site with simulated or actual volumes.
Options
In terms of what can actually be automated within the facility, there are a
whole host of possibilities, from pallet storage and retrieval, layer picking,
and voice-activated picking through to case-sortation systems, automated
vehicle loading and off-loading systems, and even advanced pallet
movement systems (unmanned vehicles, conveyors or monorails).
Source: Exel, July 2005, IGD Research, 2006
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Benefits of Automation Challenges of Automation What to Watch
Lower long-term operating costs. High initial capital investment. Software specification and configuration - the
best-designed solution will still fail to deliver the
desired results if the software is poorly configured.
The marginal cost of volume
increases is much less than with
manual systems.
It can be difficult to adapt if
significant business changes occur.
Training - despite automation, people are still
employed in a whole variety of roles, and these
people need to understand the systems and
processes in detail, and ideally to have used them
before the facility 'goes-live'.
Improved accuracy in picking and
loading.
Automation represents a long-
term commitment, from which it is
not easy to disengage.
Exception Management - systems must be
designed to be able to manage the exceptions in a
user's business model, no matter how small,
because any level of manual intervention or
reconfiguration is likely to increase costs.
Improved productivity and speed
of response.
There is a requirement for long-
term planning and vision, well in
advance of implementation.
57 IGD 2006
Key Focus - Automation in Tesco, UK
In 2001, Tesco opened a 380,000m3 facility, spread over almost 9 hectares, to act as a
state-of-the-art automated distribution centre for frozen goods. The site was purpose-
designed and built by Exel, and serves over 550 Tesco stores, assembling orders for
each store by product group e.g. ice-cream. The warehouse receives 800,000 pallets a
year of frozen goods from suppliers and some 52 million cases and two million roll-
cages are dispatched every year.
The Facilities
Real-time order status visibility
Bespoke warehouse management and information systems
Automated replenishment
Paperless 'pick to light' and radio confirmation systems, guiding personnel to the
exact pick location
In-cab yard management system
A control centre
The Process
Inbound Goods are received, system-scanned, placed on a conveyor system, weighed
and profiled, and then put away in the high-bay storage area using elevators
and cranes.
Pick Order instructions are given to pickers in the high-bay using a pick-to-light
system, where cases are picked by common batch, and then sent via case
conveyors to a sorter unit, which sorts cases by store.
Outbound The goods pass via chutes to loading personnel, who load roll-cages onto
trucks for each store by merchandise group. There is also a specific area to
service the smaller convenience store outlets.
Case-Study - Automation in CVS/Pharmacy, USA
The Business
CVS/Pharmacy is America's number one pharmacy chain, generating over US$36bn in
revenue, and dispensing prescriptions in over 5,400 stores in 36 states and the District
of Columbia. Over the last few years, CVS has been focussing on re-working their
supply chain to create a highly-responsive end-to-end fulfilment process for the drugs
part of their business.
The Supply Chain
With a network of distribution centres across the eastern and southern states of
America, including two incorporated sites from acquisitions, CVS planned to simplify
the network. This included the closure of their Garland facility in Texas and the transfer
of volumes to their Ennis automated warehouse, also in Texas. The current network in
2005 included seven full service depots, and five satellite DC's. CVS makes over 1,100
store deliveries per day with a 98% on-time delivery record across the 103,000 truck
loads making 300,000 deliveries a year. 2.5 billion items are, for the most part,
individually picked, and 70% of items are also dispatched as singles.
Supply Chain Re-design
Against a backdrop of a shrinking labour pool, increasing land and building costs, and
opportunities to make productivity gains and make inventory work harder, CVS has
implemented best-in-class computer-assisted processes. In this way, over 45% of CVS
volumes are now managed via Collaborative Planning, Forecasting & Replenishment
(CPFR) processes, thus helping to double inventory turns to five per year between 1996
and 2003, and making significant inventory gains, including an average US$34,000
inventory reduction in store.
In terms of the warehouse operations, in a push to secure less foot-print, less direct
labour, and improved productivity, CVS introduced a fully-automated system into their
37,000m2 facility in Ennis, Texas, which is half the size of a more conventional
warehouse and services stores in the south and south-west of the country.
With the help of Witron, a leading international solutions provider for automated
material handling and logistics systems, who has a particularly strong focus on picking
systems for the food and retail sectors, CVS has introduced an automated warehouse
system that gives them competitive advantage in the sector.
'Goods to Person Automation'
Source: CVS/Pharmacy, 2005
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IGD 2006
59 IGD 2006
The Solution
The facility utilises extensive automatic storage and retrieval technology to present
items to pickers as needed, and includes de-boxing stations for transferring product
from outer boxes into tote boxes, automated receipt conveyors, dynamic order picking
with product scanning and weighing, and further conveyors to transfer the full tote
boxes for store delivery around the facility. Each delivery is also customised to the store
layout. Core elements of the DC technology infrastructure are Witron's Dynamic
Picking System for individual piece-picked items and Module Picking System for
product picked in full cases.
Benefits
These store-orientated solutions have brought significant benefits for CVS:
A smaller warehouse labour force (1/3 less).
Reduced order lead-times.
The elimination of store backroom sorting and segregation.
A more cost-effective roll-out to other DC's in the network (e.g. Vero Beach, Florida
to be completed by late 2006).
Source: CVS/Pharmacy, 2005/IGD Research, 2006
'Customised Deliveries'
Source: CVS/Pharmacy, 2005
2.2.2 RFID/EPC
It is fair to say that the interest in Radio-Frequency Identification (RFID) technology and
the Electronic Product Code (EPC) continues throughout the industry, as companies
recognise the potential of this technology to revolutionise the FMCG sector. Companies
who focus too strongly on the technology element are likely to lose ground to the market
leaders in the longer term, whilst improving basic operational processes and data
accuracy will go some way in allowing companies to keep up with the early adopters.
Therefore, general interest in EPC is now no longer centred solely on the technology
element, but is moving much more towards implementation and strategic planning.
Supply chain executives want to know more about the timing for getting started and
how to develop a business plan.
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IGD 2006
This trend has been perhaps encouraged not only by the first global standards being
established in 2004 via EPCglobal, which is a world-wide user-driven standards
organisation for EPC, but also growth its commercial use. It has been reported that just
over 600 million tags were delivered in 2005 (IDTechEx, Dec. 2005), and the Gartner Group
has forecasted that worldwide RFID spending is expected to total US$504 million, an
increase of 39% from 2004. Gartner equally forecasts worldwide RFID spending to top
US$3 billion by 2010, as the experience from the industry innovators helps drive broader
adoption.
Benefits of EPC
Shareholder value, through revenue growth, profit improvement and higher capital
efficiency, could all be affected by the potential of EPC, with the most positive gains
coming from case and pallet-level tagging in the medium term.
1. The potential for sales up-lifts from improved on-shelf availability is no doubt the
primary source of benefit, and companies will need to consider a number of factors
when quantifying this improvement:
Typical category out-of-stock (OOS) rates
Percentage lost sales
Percentage OOS situations that EPC could address
Speed of tag implementation
2. Increased productivity in-store and within the warehouse may also be large-scale
benefit of EPC, due to improved stock files, better location visibility and greater
scanning efficiencies. Activities affected may include:
Cycle counting
Data entry/reconciliation
Picking
Scanning of licence plates
Replenishment from store back-room
3. Other benefits could include demand-driven inventory levels, reduced claims for
shortages, lower shrinkage, obsolescence and product diversion figures, improved
asset management, and greater transport efficiencies.
Challenges
There is nevertheless general acceptance that challenges to broader-scale
implementation still exist, involving the costs, technology short-comings,
standardisation, and clean, accurate data. In terms of cost drivers, these can be split
between 'up-front' costs and 'recurring' costs:
1. Up-front Costs
Reader systems (antennas, sensors)
Software (customised development, data management)
Data integration and alignment services (process or system changes)
Infrastructure (label printer servers or EPC data storage)
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2. Recurring Costs
Tags
Maintenance and support
Incremental DC/manufacturing labour (until automatically tagging for an entire
product line)
Incremental inventory costs (holding tagged and non-tagged products)
Corporate overheads (manage EPC infrastructure and support)
Many of the problems associated with the adoption of RFID/EPC can be solved through
effective business planning. In particular, any organisation must be clear on the business
objectives, and then aim to map the technology to these objectives:
For example, P&G want point-of-sale (POS) information in real-time to help drive
manufacturing, and are implementing an end-to-end information system linked to its
own supplier base, in order to be more responsive and manage supply chain
complexity.
Companies like Dell Inc are implementing new systems to supervise their
manufacturing system better, seeing their RFID business objective as effective
product tracking to reduce inventory and waste.
Key Focus - Wal-Mart US, RFID Roll-Out
Following the retailer's trial a year ago with 100 preferred suppliers, Wal-Mart has now
set-out plans to double the number of RFID-enabled stores to 1,000 by the end of
2006, and is due to go-live with a further 200 suppliers. Wal*Mart is driving RFID roll-
out at a case and pallet level, and the introduction of the Gen2 standard for tags will
help with wider adoption.
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Key Focus - Metro/Nestl & SATO Germany, RFID
During Metro's leading-edge work with RFID, tagged bottled shampoo was discovered
as having low read rates. When in close proximity to the shampoo, there was
degradation in the electromagnetic field of the RFID dock-door reader.
In response, SATO - a barcode labelling, printing and RFID solutions provider - placed
an air gap between the chip and the bottle, leading to the creation of the 'Flag Tag'. A
standard adhesive label is folded to produce a flap at right angles to the product, and
the chip is embedded into one side of the flap. In trials, read rates improved
dramatically, and there was no reduction in performance even when the tag was
folded flush with the label.
Nestl participated in the Metro's RFID roll-out, and is now automatically labelling
pallets of goods with tags embedded in Flag Tags. SATO installed an automatic pallet
labelling system in Nestl's warehouse in Rangdorf, Germany, which went live in early
2005.
Sources: C. Heinrich (SAP AG), in 'Logistics & Transport Focus', June 2005/IGD Research, 2006
Logistics & Transport Focus, Summer 2005/IGD Research, 2006
Global Commerce Initiative (GCI) & IBM Business Consulting Services, 2005/IGD Research, 2006
2.2.3 Global Data Synchronisation (GDS)
Simply, the GDS network aims to include the uninterrupted flow of standard, compliant
product information between manufacturers and retailers, making it easier to do
business. Accurate product data is viewed as the base building blocks for other supply
chain integration initiatives, including EPC roll-out. Good data is the key to best-in-class
How?
Product information is communicated between trading partners in an automated,
quick and faultless way.
Changes to the product data are known instantaneously to all partners.
63 IGD 2006
Global Data Synchornisation Vision
Source: Sara Lee, 2005/IGD Research, 2006
The Building Blocks of the GDS network
EAN-UCC standards
Certified data pools
Interoperability between the various data pools
The registry to act as "global yellow pages" of manufacturers and the products they
sell
Benefits of GDS
Increased sales
Improved speed-to-market
Improved on-shelf availability for promotions and new product
introductions.
Reduce costs
Fewer deductions and lower returns
Increased productivity
Reducing the time spent by sales and buying teams handling new
line data
By customer service on purchase order corrections
By the finance teams on invoice reconciliation.
1.
A manufacturer
sends item
data to its
home data
pool.
2.
The data
pool sends
basic item
data to the
registry.
3.
The registry
holds basic
item data off all
items including
its home data
pool.
4.
A retailer
requests a
subscription at
their home data.
The retailers
home data pool
will forward the
request through
the registry to
the information
provider.
5.
Trading
partners
synchronise
item
information
between their
data pools.
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IGD 2006
Frequently-Made Remarks about GDS
"Retailers are not ready" - Many are preparing themselves, and so suppliers should
be ready to talk to them about GDS.
"Standards are not ready / complete" - The available set is considered to be
workable.
"Not all local attributes are in GDS" - You can always start with what's available.
"We don't want to synchronise price data" - This is currently acceptable, but
standards including security are under development.
"We don't have resources" - GDS needs to be a business priority mandated by
Senior Executive Management teams, thus helping provide clear direction to local
management.
"We have a top line issue and need to focus on other priorities" - This might
increase if suppliers are not able to comply with retailer requests, and again
enforces a priority decision for local management teams.
Source: Sara Lee, 2005/IGD Research, 2006
65 IGD 2006
2.3 Optimisation Through Transport
Key Points to Note
Factory-gate collections and cross-docking practices are becoming more
widespread in the food & grocery sector, as international retailers aim for improved
supply chain visibility and control.
Inter-modal distribution offers the logistics sector a means of driving supply chain
efficiencies, whilst helping reduce environmental pressures. But there are still many
challenges to overcome.
End-to-end transport management, from global sourcing through to store delivery,
is just one of the many total supply chain solutions that a growing number of
logistics service providers have to offer the industry.
Transport inefficiencies and rising costs are the two key challenges facing the road
transport sector in Europe in particular. In terms of costs, transport accounts for a
significant proportion of total supply chain costs (37%+ according to IGD's UK Retail
Logistics 2006 report), and certain factors are playing a key role in challenging transport
users:
fuel costs
legislation
road tolls
congestion charging
lack of investment in major road, rail and port networks.
In terms of efficiency gains, there are still many opportunities for transport users to
reduce the number of trucks delivering half-empty outbound loads and empty return
legs.
There are various initiatives that both retailers and leading manufacturers are now
employing to optimise transport resource and increase efficiencies, including factory-
gate pricing, cross-docking, inter-modal activities, and fourth-party logistics transport
management.
2.3.1 Factory Gate Pricing
As the leading supermarket groups, such as Carrefour, Tesco and Metro strive to gain
further visibility of their end-to-end supply chains, the phenomenon of Factory Gate
Pricing (FGP) has over the last few years become widespread practice in the food &
grocery sector. Retailers are no longer only interested in the product and the pricing
strategy, but the whole supply network, and how improvements and efficiencies can be
made upstream to improve performance downstream.
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IGD 2006
What Makes up the Total Product Cost?
Source: Tesco
Raw material and
supplier inbound
Supplier
Transformation
Retailer Secondary
Logistics Network
- DCs & Secondary Transport
Retailer
Inbound
Logistics
- Primary
- Transport
In-store
Logistics Back
Door to Shelf
Availability Costs
- Markdown
- Waste
- Lost sales
- Customer dissatisfaction
Goods/Material Flow
Information and Cash Flow
The focus for the retailer is to have visibility of inbound supplier transport costs, so that
any scale efficiency opportunities can be identified from potentially integrating retailers'
primary networks with their secondary fleet movements into stores. Subsequently, the
factory-gate initiative is also about supply chain control, which presents both
opportunities and challenges for the manufacturing supplier base.
Some of the challenges for suppliers involved in factory-fate collections may include:
The collecting vehicle arrives without a booking
The collecting vehicle does not arrive at all
Cleanliness of the vehicle can sometimes be compromised
Vehicle can contain returnable transit units, like cages
Increased supplier costs, due to loss of scale efficiencies for other customers
In contrast, some of the benefits of factory-gate collections, especially for the smaller
manufacturer, could potentially include lower overall costs, lower risk, and a focus on core
competencies through:
Lower capital expenditure on vehicles and systems
Reduced head-count (drivers, administration staff, yard management)
Smaller administrative burden
2.3.2 Cross-Docking
Cross-docking, on the other hand, involves the reduction in handling by sending
warehouse received goods directly out to stores or another transit point, by-passing
warehouse storage and traditional picking.
Order quantities can be allocated 'pre-distribution' - where the end-customer is
assigned prior to receipt by the retailer - or 'post-distribution' - where the end-customer
is assigned by the retailer warehouse.
67 IGD 2006
In either process, the aim is to move stock straight out onto waiting vehicles. Double-
handling and inventory are accepted supply chain costs, and cross-docking works to
reduce, if not eliminate, these by improving productivity and speed of transit.
Premise:
Enough volume to warrant a dedicated process
Effective information and visibility
Cross-functional communication and co-ordination
Real-demand reactivity
IT system that supports the new process
Constant product flow in correct quantities and quality
Case-Study - Metro Group Logistics Germany, FGP and Cross-Docking
The Business
The Metro Group trades across various formats from the Cash & Carry business
(Metro/Makro) through to Food retailing (Real/Extra) and Non-Food retailing (Planet
Saturn, Media Markt), as well as the department stores Kaufhof, generating over
50billion turnover. Metro Group has 2,300 stores in 30 countries.
Within Germany, Metro manages one million SKU's from 8,000 suppliers, servicing
2.5million customers a day. In terms of logistics, in the past, a typical Cash & Carry store
could receive over 150 vehicle deliveries a day, where over 80% could only be one
pallet of stock, or on average 3.1 pallets of stock per vehicle.
The Initiative
In order to reduce this complexity within the supply chain, Metro Group Logistics
(MGL) focuses on cross-docking, consolidation and stockless inventory processes,
supplemented by factory-gate collections. To support the development of the Metro
Group across Europe, MGL aims to connect networks across borders, and has seen
rapid expansion over recent years:
1996 1999 2000 2001 2003 2004 2005 2006
Germany Turkey Poland Austria Bulgaria Russia,
Belgium
Netherlands
UK
Greece
Slovakia
Hungary
Ukraine
Czech Rep
Italy
Spain
Serbia
Croatia
Bosnia
Romania
Source: Metro Group, 2005/IGD Research, 2006
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IGD 2006
Factory Gate Collections Process
1. Metro carried out the initiative in partnership with their third party logistics
providers (3PL) with no long term contracts or fixed costs, it enabled greater
flexibility in the process.
2. Alignment of the rules:
Standardisation of transport documentation
Priority lanes for MGL/3PL for loading, with fixed collection times
Well-built pallets with clear labelling
All claims are centralised, so MGL manage all the financial transactions
MGL will bear the cost of small damages
Multi-drop store formats are consolidated into one shipment
Results
Through having visibility of fuel costs and logistics costs separately from the cost of
goods, Metro Group has identified the following benefits from taking control of the
transport element of their inbound supplier deliveries:
Macro-economic effects worth 150m, of which 70m savings from transport
consolidation and 80m savings from reduced waiting times for vehicles. This has
generated less traffic, and so less pressure on infrastructure and less of an
environmental burden.
98% on-time delivery, which has allowed for synchronised replenishment
A reduction in damages of 20%
Improved availability of +7%
Reduced total inventory
Cross-Docking Process
Combining transitional groupage, direct to store deliveries, and cross-docking via
other centres, Metro has a series of cross-dock facilities around Germany: Palletised
ambient food (16), Palletised non-food (35), Chilled products (23), Hanging
garments (17), Parcels (65).
4,400 suppliers are involved
8.3 million shipments per year worth 10bn
Some suppliers with agreed procedures can receive replenishment orders directly
from stores
Pre-allocated orders are prepared and picked by suppliers and then cross-docked
through the network
Results
The average truck fill to Cash & Carry outlets has increased to 30 pallets - full truck
loads.
69 IGD 2006
Metro Group's Key Learnings
1. Strong commitment from the internal teams - Sales, Buying and Supply Chain
2. It is important to define the rules and accountabilities, particularly for ordering and
goods receiving
3. Define the principles for dealing with the logistics service providers
4. Separate logistics-related negotiations from merchandising negotiations by the
commercial team. This can take time, and it took Metro three years to transfer the
model outside the German territory
5. It can be a challenge to get suppliers to calculate the transport costs, as these are
still often considered to be an integral part of their operations
Source: Metro Group Logistics, 2005/ IGD Research, 2006
2.3.3 Intermodality - A European Perspective
There is increasing demand for inter-modal services from commercial organisations,
encouraged by government policy, general environmental concerns, and congestion on
road networks. High visibility of goods movements can be gained from combining
different modes of transport - air, rail, sea and road freight capabilities - aiming to make
the total supply chain more responsive.
Nevertheless, there are equally many challenges facing further growth in this logistics
sector. Capacity and infrastructure issues combine to increase costs and congestion on
rail links and waterways, with a knock-on effect on quality of service provision. In
addition, there is the problem of the inter-operability of the modes. For example, it has
been reported that four different train engines are required to take goods from Austria to
Sweden, that is to say, one per country crossed.
In response to these complexities, some in the logistics sector have been calling for a
level of harmonisation at European level for tax systems, subsidies, working regulations
and weight limits in this area of operation. Logistics providers are also launching
'gateway' strategies. These aim to combine volumes to increase freight buying power and
critical mass, and drive better margins and competitive pricing through greater
consolidation. It is argued that centralising document management and financial control
for pan-regional movements will also help reduce hidden costs, and so improve decision-
making
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IGD 2006
Key Focus - SPaP Bratislava, Inter-modal Hub Management
In order to exploit the economic growth in Eastern Europe and entry into the
European Union, a Slovak company - SPaP - based at the Port of Bratislava on the
Danube, is developing its potential as an inter-modal hub for road, rail and water-
transport. With close proximity to both Vienna (Austria) and Budapest (Hungary), the
port boasts:
Connections to motorway networks and the Bratislava-Rotterdam shuttle train
service
Capability of transferring containers between all three modes of transport,
particularly over-sized or over-weight cargoes via a special crane
100,000m2 of storage, with one quarter being sheltered warehousing, as well as
almost 5,000m2 of customs warehousing
A direct connection to a local oil refinery, pumping fuel direct to ships or from ships
to rail tank wagons
SPaP expects to handle approximately 25,000 containers at the Port of Bratislava in
2005, but the port is capable of meeting much higher demand for both transhipment
and container warehousing. The water level of the Danube has been stabilised by dam-
building further upstream, allowing improved effectiveness in carrying higher
volumes of goods.
Further traffic growth appears to be secure due to the following factors:
The Rhine-Main-Danube waterways between the North Sea and the Black Sea is
one of ten trans-European transport corridors having priority bidding for EU
funding
Romania and Bulgaria are also due to join the European Union in the near-future
The range of goods that can be handled at the port
Source: Pierre Topolski, 'Supply Network', June 2005/IGD Research, 2006
71 IGD 2006
Inland Waterways - Linking Global with Local
Case-Study - Auchan (France) Using the Canal Network
The Business
One of the leading users of containerised river transport in France, Auchan moves 60%
of its imported non-food products by barge to its warehouses, and views this mode of
transport as a key alternative to using the congested road network. Over the last ten
years, Auchan has grown river modal participation from just 5% of imported goods in
1995. Since purchasing Docks de France in 1996, Auchan has re-organised its storage
and distribution network for non-food lines (such as textiles, DIY, bric-a-brac, hi-tech
and household equipment), around three national distribution centres in Lesquin
(Lille), Meyzieu (Lyon) and Villab (South of Paris).
The Process
With 95% of imports coming from Asia and arriving by container directly into French
sea-ports (Marseilles-Fos, Le Havre, Dunkerque or Anvers), each warehouse facility is
situated reasonably close to a river port, from where the final journey will be carried
out via road haulage. In 2004, Auchan imported 25,000 20ft equivalent containers into
Europe (representing 6-7% of non-food turnover), of which 11,800 went into France,
and 6,400 of those were transported from the sea-port to the NDC via a river-port by
barge. For example, the warehouse at Villab will receive approximately 20-25
containers from the Port de Gennevilliers every day.
Challenges
Auchan equally admits, however, that multi-modal transportation can present
challenges, and believes there are three basic pre-requisites before venturing into river
transport:
1. Consolidation of volumes towards fast-moving warehouse facilities
2. Logistics facilities close to the river network.
3. A distance greater than 150kms of continuous maritime transport
Containers can be blocked at sea-port due to industrial action, thus requiring lead-
times to be extended to cover all eventualities. Delays at sea-port may require traffic to
be moved onto the road network, and Auchan admits that river transport can be less
flexible in terms of time (30 hours for Le Havre-Paris), and the need for organisation by
shuttle between locations.
There will equally be some warehouses that are not close to inland waterways, and so
cannot be serviced by river, for example Auchan's Atac supermarket non-food
warehouse in Amiens. Although the costs and performance can be on-par with road
transport, the use of inland waterways (as with rail), is not viable when travelling less
than 150kms.
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IGD 2006
Advantages
But when companies have a choice, Auchan believes it is better to favour a more
environmentally-friendly and sustainable alternative to road transport. In this way,
Auchan has reduced its inbound transport kilometres by 12%. Whilst other major
retailers, including Carrefour, Monoprix and Toys R Us are moving in the same direction,
containerised river transport in France grew by over 6% in 2004, and is expected to do
the same in 2005.
In addition to the road transport gains, the main advantage of the river port over the
sea-port is that the containers can be stored there for up to 45 days, at a lower cost
than sea-port demurrage, and a service provider can also carry out the customs
procedures, thus smoothing deliveries into the NDC.
Although seeming complicated by the number of interventions, the process works
relatively seamlessly for Auchan, who works directly with three main partners - the Port
of Lille, and two service providers who manage the container flow between Paris and
Le Havre and Marseilles-Fos and Lyon. To ensure that the lead-times are viable and
secured, Auchan's lead-logistics providers co-ordinate with all other links in the supply
chain.
Source: 'L'Usine Nouvelle', June 2005/IGD Research, 2006
Long-Distance Sea-Freight
Once a commoditised service, sea freight has been attracting more attention in recent
times, particularly in response to increasing world trade since 2000. The market has
increased from 68.2 million TEU's (twenty-foot equivalent container units) to 114.4
million in 2004, representing a 68% increase. It is of no surprise to learn that China
dominates the world market, and the trans-Pacific sea routes dominate global
movements (52% of sea freight, both directions). There have also been surges in sea
activity between the major manufacturing locations in Asia, in India and Central and
Eastern Europe. The Asia-Europe and trans-Atlantic sea routes represent 15% and 11% of
total sea movements respectively.
Accompanying these trends, there have also been improvements in both dependability
and predictability of sea freight operations. Modern ships are now faster - average speed
has increased from 21 knots to 25 knots - thus reducing the time on the water. The sector
is working together to increase capacity through larger vessels (8,000 TEU's instead of
5,000 TEU's), and port facilities are extending in terms of size, storage and cranes. Such
additional capacity is expected to come on line throughout 2006 and 2007.
73 IGD 2006
Key Focus - ASDA UK, Use of Ports
ASDA has recently signed a deal to develop a new 20m import centre at Teesport,
providing ASDA with an international logistics operation in the north east of England
for direct international imports of non-food lines. The deep-sea container facility will
not only help ease congestion at more southern UK ports, like Felixstowe and
Southampton, but will also save two million road miles a year through shipping 70%
of its non-food distribution direct to Teesport.
Short-Sea Shipping - Supply Chains from Eastern Europe
Whilst many companies in their search for a cheaper manufacturing base are sourcing
products from Asia, some are also turning to their Eastern European neighbours, such as
Poland, Slovenia, the Baltic States and even Russia. Companies purchasing transport in
these regions have a variety of options, including the more traditional all-truck overland
system, but increasingly short-sea solutions are becoming a more considered option.
The Process
The process usually involves the movement of 45ft, pallet-wide, high-cube containers of
finished goods from factories in Eastern Europe through to Benelux and the UK. These
containers have the same capacity as a 13.6m trailer, but have the additional benefit of
improved security. There appears to be a trend towards this type of transit unit, which
overcomes problems of different unit sizes, and will ensure the smooth inter-modal
transportation of goods across Europe without the need for disruption, opening and re-
packing at each transit point.
The short-sea shipping company may be given 10 to 14 days' notice of a defined delivery
window into the receiving warehouse, and the service provider will then contact either
road hauliers or rail-providers to collect the box from the factory. The goods are then
moved to the export port, such as Gdansk or Riga, and shipped on a regular service into
Western European ports such as Ipswich and Tees port in the UK, or Rotterdam in the
Netherlands and Zeebrugge in Belgium.
The advantage of the short-ship movement is that sailing and arrival times can be
predicted more accurately and the smaller size of vessel reduces loading and discharging
delays. In the UK, the benefit of a northern and southern entry point is the subsequent
reduction in over-land driver time, and so the reduced risks of early and late deliveries,
both of which present the warehouse with productivity issues. Smaller ports are seen to
play a key role in short-sea shipping, due to their acceptance for lower traffic volumes,
management of vessel berth, and labour availability.
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IGD 2006
Short-Sea Shipping - Opportunities and Challenges
Opportunities Challenges
Cheaper than over-land movement.
More secure, as goods are shipped in a
sealed container.
More environmentally-friendly.
Wide political support, especially from the
European Commission.
Less congestion and traffic bottlenecks.
Improved quality and service compared to
low-cost international truck hauliers.
Local hauliers are used at each end of the
short-sea trip:
- shortening the time spent on the road
- overcoming delivery window issues
- reducing language barrier concerns
Ability to convince sourcing companies of
the viability of short-sea shipping for time-
pressured supply chains.
Competition from rock-bottom pricing of
Eastern European haulage companies.
Overcoming the prevalence of price as the
main purchasing objective, despite
environmental concerns, quality issues,
and poor service levels.
Customs inconsistencies between member
states, despite already working within a
harmonised framework.
Larger sea-ports can be unwilling to
handle lower-volume carriers.
Source: Kuisiu Linija, 2005/IGD Research, 2006
Future Developments
More traffic will be pushed towards short-sea shipping as the driver shortages and road
congestion become more acute. Ironically, it is likely that the pull of well-skilled, English-
speaking Eastern European drivers into the UK market, where the shortage of skilled
drivers is considered to be a significant challenge, will reduce the pool of low-cost drivers
left for operators in Eastern Europe, thus pushing up costs and reducing service quality.
Technology improvements will also play a leading role in ensuring traceability of the
containers. Integrating hauliers and shippers through a web-based system will allow
operators to log-on and track goods movements in real-time. Some in the industry
believe that containers will be tagged or bar-coded, so they can be entered into an IT
system and tracked as a unit.
Finally, as is the case in many parts of the supply chain, the key to a successful flow of
goods from one region to the next is often based on the people carrying out the work.
Having a combination of the right people and an open, trust-worthy business
relationship will help overcome the most challenging of supply chain issues, and ensure
those tight delivery windows are met, on time, every time.
75 IGD 2006
Key Focus - Kursiu Linija
Kursiu Linija was created in 1995 to provide logistics services from Russia and the Baltic
States through to Western Europe, and is now moving over 125,000 TEUs annually for
major clients, such as Masterfoods, Marks & Spencer and IKEA. The company employs
seven fully cellular vessels, owns its own fleet of pallet-wide, high-cube boxes - over
3,000 units in total - including refrigerated containers. Kursiu Linija services a number
of ports, including Kaliningrad, Klaipeda, Ostend, and Ipswich and has even opened
new offices in Felixstowe as part of their growth plans.
2.3.4 4th Party Logistics Transport Management
Using a major third party logistics provider to manage transport orders and outsource
the movement of goods to a series of other haulage providers can be viewed as an
opportunity to take a more holistic approach to transport management, thus driving
further efficiency gains but still having one point-of-contact for issue resolution and
reporting.
The Process
Improved network design and execution from greater visibility of the end-to-end supply
chain can cut transport costs quite considerably. Through examining all potential
movements across a particular region, loads, drivers and vehicles can be optimised across
multiple customers, whilst ensuring service levels are met. The ability to share vehicles
and/or combine outward and return trips can considerably reduce the number of part-
loads and empty trips.
At the heart of such a process is the need for an integrated information system, which is
robust, secure and has the ability to execute orders in the most cost-efficient manner,
including status tracking, trip scheduling, planning and optimisation, key performance
indicators and trip payments.
The Benefits
Lowering overall transport costs
Increasing service proficiency, through constant monitoring of carrier performance
Reductions in breakages, losses and missed deliveries
Greater speed and flexibility
Creating a genuine pan-regional platform for transport management
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IGD 2006
Case-Study - Exel and Unilever UK, Foods Freight Management
The Process
Exel manages a pan-European solution for managed transport from three multi-user
control centres in Mechelen (Belgium), Nieuwegein (Netherlands) and Hams Hall (UK),
plus some dedicated sites. The operations run 24-hours-a-day, seven days-a-week, and
the service is used by more than 20 Exel customers, and interacts with more than 200
transport carriers.
In 2001, Unilever was Exel's first customer to pilot the solution, and now Exel controls
all international primary transport for the Unilever UK Foods. This solution manages all
scheduling, route optimisation and European carrier management across 18 different
European countries, and deals with almost 40,000 orders a year.
The Benefits
Better fulfilment at retailer distribution centres
Transport cost savings through reductions in mileage and route and load
optimisation
Environmental gains in terms of truck movements and emissions
Overall simplification of the transport management processes.
Exel aims to work to meet the challenges presented by demand for smaller, more
frequent deliveries and shorter lead-times, which can sometimes conflict with
optimisation techniques.
Service Growth
In 2005, Unilever in Brazil has contracted Exel to provide an integrated supply chain
solution to include in-plant logistics, warehousing and managed transport, within
Brazil and towards Europe for home and personal care products. For example, Lux soap
bars will be exported from Brazil to a platform in Europe, where the European
managed transport team will then arrange distribution out towards 18 other European
countries. The solution will provide Unilever with complete visibility and tracking.
Source: Exel, July 2005/IGD Research, 2006
3. International Differences and Emerging Markets Managing International Supply Chains
77 IGD 2006
3. International Differences and Emerging
Markets
Summary
IGDs international survey confirmed that companies encountered different supply
chain challenges depending on the market in which they operate. These
differences can be grouped under cultural, infrastructural & operational, internal &
external business management issues, and legislative differences.
The emerging markets of China, India and Central & Eastern Europe offer a plethora
of opportunities for the food and grocery industry, in terms of global sourcing,
cheaper production costs, and large populations with high, but relatively untapped
consumer demand.
With 12.9% retail growth in 2005 alone, IGD predicts that China will soon become
the second largest food retail market in the world by 2020, with India moving into
a top five position. With widespread investment from the leading international
food & grocery players, further supply chain investment will certainly encourage
this trend.
Nevertheless, combining the size of these countries and the remoteness of some of
their populations, with a number of legislative restrictions and infrastructural
limitations, there are significant challenges for the speed of supply chain
transformation.
In terms of global sourcing, companies need to focus on inventory management,
effective cross-functional communication, quality and customs control, and strong
logistics and financial management.
India currently restricts foreign direct investment from multi-brand retailers, and so
it is fair to say that there has not been the same level of investment in developing
modern retailing practices and new transport links as has been the case in China.
Leading manufacturers, however, are present in the Indian market, and via the
distributor route to market, and the use of field sales forces, are able to reach the
most remote areas of the country and increase their brand awareness.
Central & Eastern European countries have increased their profile on the
international retail stage, as the major international retailers move into these
markets. Retailers are transferring best practice into these markets bringing their
supply chains up to speed and in line with their domestic markets.
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IGD 2006
3.1 Managing International Differences
Within the IGD international survey, in order to understand the similarities and
differences between geographic areas and whether there were any truly international
supply chain issues, IGD asked companies to identify differences in the supply chain
challenges faced by different country markets.
In response, 72% of companies cited different supply chain challenges depending on the
market, which highlights the real diversity in this area of operation for many companies.
In order to help differentiate these issues, IGD has grouped them into distinct themes:
Cultural differences
Infrastructural or operational differences
Internal and External business management issues
Legislative differences
International Differences in Supply Chain Challenges
Cultural
Different shopper preferences, particularly
with regards fresh produce
Different language variants/customisation
Germany prefers lean meat
Japan prefers meat with more fat
Indians prefer to shop in wet markets for fresh
produce, rather than modern supermarkets
Infrastructure &
Operational
Lack of cold chains in some developing
markets
Bottlenecks at ports
Export and goods movement permit controls
A lack of truly international logistics
companies means that different contractual
agreements have to be made for different
countries
No public cold chain logistics supply in China
South American ports
Permit issues in Russia and former Soviet
Union states, India and China
Internal
Demand volatility depending on brands life-
cycle
For retailers, international franchise operations
are generally managed differently from
wholly-owned stores
Critical mass can be an issue in developing
markets, leading to service level issues
When exporting, the required quantities are
often fixed well in advance, compared to
'home territory' orders which can be very
volatile
Availability issues in some developing markets
can be solved through using extra lower-cost
labour, whereas in more developed markets
alternative solutions are required
contd.../
79 IGD 2006
International Differences in Supply Chain Challenges (continued)
External
Different approaches to bar-coding,
packaging, case-sizes, shelf-ready packaging,
and pallet requirements
Different trade structures, with different levels
of market concentration, require different
outbound logistics solutions and demand
planning
Different performance management
In the UK and northern Europe there tends to
be more centralised distribution and delivery
into distribution centres, whereas in Italy,
Spain and southern Europe, there is a
tendency for more direct-to-store deliveries
The UK focuses heavily on delivery within a
fixed hour delivery slot, whereas in France it
could be delivery on the day, but with heavy
penalties if this is missed
The UK is viewed as one of the most difficult
markets to satisfy, due to short lead-times and
demand fluctuations
Legislation
Different legislative requirements for
permissible ingredients in food products
Different requirements for ingredient
declarations and labelling
Different legislation for driver hours
Switzerland - vis--vis the adoption of the
European Working Time Directive - Transport
Undeniably, the emerging markets of China, India and Central & Eastern Europe are
experiencing growing international stature and phenomenal economic growth.
However, whether through legislative restrictions, infrastructural inadequacies, or simply
the market structure, all present the international supply chain with a sometimes distinct
set of challenges and opportunities. As a result, these countries have become priority
markets for international retailers and manufacturers alike, and will be the focus for the
remainder of this chapter.
Case Study Wal-Mart, Assimilating International Operations
Market Dynamics
Wal-Mart is held up as a world class supply chain operation with highly sophisticated
global processes to help its people manage a multitude of products and systems. But
for any business of this scale to be successful there is a balance between being global
and being local. Taking two highly developed retail models UK and Canada, there are
clear distinctions between the Wal-Mart businesses.
Wal-Mart has entered both markets through acquisition and demonstrated strong
growth through store openings and increased sales. But the starting points for both
businesses has been very different the UK with a focus of food and Canada with a
focus on non-food (alternatively known as general merchandise).
Supply Chain Infrastructure
The differences between the two businesses are reflected in the supply chain
infrastructure needed to support them.
Within its Canadian operation there is a high level of consistency between processes
to ensure product is delivered in an efficient manner. With the average distance to
store over ten times compared to the UK transport efficiency is a determining factor.
The warehouse is a highly automated environment akin to a production environment.
In this respect Wal-Mart Canada possess very strong implementers within its business.
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Wal-Mart UK
Heritage in food
Acquired Asda in 1999
Multiformat operation
282 stores, 40,000 employees
Average store 43,000 sq. ft.
Wal-Mart Canada
Heritage in non-food
Acquired Woolco in 1994
Single format operation
262 stores, 70,000 employees
Average store 120,000 sq. ft.
Wal-Mart UK Canada
No of DCs
Average distance to store
Inventory Management
Distribution Function
Clothing Distribution
Technology Employed
Core Focus of Distribution
21
48km
5% stockless
In-house
Separate site
Manual (with some
automation)
Store friendly deliveries e.g.
extensive use of cages
6
500km
90% stockless
Outsourced
Integrated
Fully automated
Simple efficient distribution
e.g. deliver in bulk
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In the UK the supply chain strengths are more technical; with limited amount space the
supply chain needs to ensure fast and frequent replenishment in a store friendly
manner (enabling the product to be put onto shelf in the quickest way). Centralised
orders are also commonplace.
For Wal-Mart simplicity and accountability enables execution and thats what helps to
deliver results. Sharing global processes is an important aspect of any modern
international business but they need to assimilate the differences between the
different countries of operations. This will undoubtedly change how best practice is
implemented but ensure it is sustainable for businesses in the future.
Conclusions
Change is a compelling argument in the UK but consistency delivers better results in
Canada
David Cheesewright, COO, Asda/Wal-Mart UK
Source: ASDA, 2005/IGD Research, 2006
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Key Points to Note
The Chinese economy is booming, competition is on the increase, and retailers are
not only sourcing large quantities of product from the country, but are also
opening increasing numbers of stores, as the Chinese government continues to
reduce restrictions on foreign direct investment.
Opportunities in global sourcing include high local growth rates, driving further
investment and stability, and a cheaper, flexible workforce, which can help improve
margins.
The challenges of the global sourcing, however, are numerous. Infrastructure,
production and quality issues can all affect inventory management,
communication channels and the financial and administration burden.
3.2 China Retailing and Global Sourcing
3.2.1 Key Developments
China's production capacity for clothing alone is reported to have grown from +8% per
year between 1995 and 2002 to a staggering +26% in 2003, when quotas were lifted on
imports into the European Union (EU). Combined with India, Mexico, Brazil and Turkey,
and with further emerging economies such as Russia and Vietnam also likely to join the
World Trade Organisation in the near future, the growth of international trade will
continue to accelerate.
The traditional markets of Western Europe, the USA and Japan now need these emerging
markets to maintain their own growth agendas. In response to such high import growth
rates, the EU re-instated quotas on products from China, limiting import growth of ten
types of textiles to between 8% and 12.5% annually. This has lead some companies to cut
back the quantity of product sourced from China, and to ensure that risks to supply were
managed through a more varied sourcing programme.
In contrast, many companies are now seeing developing markets as key growth markets
in terms of retail sales, with leading retailers and suppliers alike - including Wal-Mart,
Carrefour, Metro, Tesco and Procter & Gamble - all driving significant growth agendas.
China and India together account for 40% of the world's population, and the global
expansion of the consumer goods market will go some way in helping these countries
support the growing needs of their own populations. The Chinese Commerce Ministry
has recently reported that it estimates Chinese retail sales to have risen 12.9% in 2005,
boosted by rising incomes and tax breaks, although household consumption is said to
remain a relatively low share of overall growth.
China is one of the most diverse and vibrant grocery markets in the world, and
competition is now on the increase. IGD predicts that China will become the world's
second largest food retail market by 2020 behind the USA. A combination of organic
growth and supply chain development will help retailers consolidate their market
positions, especially as international retailers hold only a 3-4% share of the total grocery
market.
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Carrefour acquired a 100% stake in its joint-venture in October 2005 and during the
year had launched 14 new stores, bringing the total to 65 stores. Another 20 new store
openings are planned for 2006.
Tesco already has over 30 hypermarkets in China through its 50% stake in the Hymall
chain. Predominantly based in Shanghai, there are plans to extend into the South and
into Beijing. Tesco's Chief Executive Officer (Sir Terry Leahy), has already announced
that he believes the company to be only 20% into its international expansion plans.
Metro was the first foreign retailer to take advantage of the liberalisation of Chinese
investment rules. They operate 29 stores on the mainland and have announced plans
for a further 40 stores over the next 3-5 years.
Case Study - Wal-Mart, China
In contrast to sourcing products from China, Wal-Mart is also a large international
retailer trading within China. In addition, Wal-Mart has recently announced plans to
expand its presence in China further, particularly in second and third-tier cities, putting
more investment into middle and western China, where the economy is less well-
developed. Wal-Mart opened its 50th store in China in November 2005, and hoped to
increase its portfolio to 55 stores across over 23 cities by the end of 2005.
In terms of supply chain and warehousing, IGD research has shown that Wal-Mart is
one of the most developed retailers in the country, having regional distribution centres
in the coastal cities of Tianjin in the North and Shenzen in the South. These warehouses
solely manage non-food products, because food deliveries are made direct to Wal-
Mart stores by suppliers. This contrasts with the majority of smaller retailers, who will
receive their deliveries through China's significant wholesale-distributor network.
There are over 300 wholesalers in China, servicing mainly on a regional basis.
Centralised distribution through regional distribution centres is at a relatively low level
of development in China, mainly because many retailers only have a small store
portfolio and so it is not necessarily economically viable to invest in such expensive
fixed assets. Large international retailers who have developed sophisticated global
sourcing centres in China are also able to use the same facilities for distribution to their
Chinese stores, creating greater supply chain efficiencies. For example, Wal-Mart's
global procurement centre is also based in Shenzen, and was responsible for sourcing
US$18 billion worth of goods from China in 2004 alone. Larger suppliers are also
investing in centralised distribution which will allow them to deliver to the leading
retail customers within 24-hours.
One aim of the centralised strategy will be to gain control over the supply chain
network to ensure:
Improved service levels
Reduced lead-times
Better availability
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After all, one of the biggest challenges is short deliveries, which can be due to:
Poor inventory management
Demand exceeding production capacity
Poor technology management
Congestion in back-of-store operations.
Wal-Mart therefore encourages its suppliers to use their distribution centres, and even
offers backhaul options for those suppliers who are unable to deliver efficiently
through its outsourced transport operation.
Case-Study - Carrefour, China
Context
Distribution of products in China is difficult because of the size of the country and the
lack of sophisticated transport services, particularly for co-loading options. This has
meant out-of-stocks of 10% on the shelves, and only 60-70% order fulfilment on the
contractual delivery date.
Aim
To increase the availability of Carrefour-label products through centralising inventory
for all private-label suppliers into a number of consolidation centres in Beijing,
Shanghai and Guangzhou.
Source: Carrefour, 2005
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Process
These centres are all out-sourced and Carrefour fixes a minimum stock level per
item.
The inventory belongs to the supplier.
The stores order daily from the consolidation centres, and the supplier invoices
each store monthly based on the quantities that have been delivered.
Results
100% on-time delivery to stores
Inbound order-fulfilment increased from an average of 60% to 99%.
Inventory reduced from an average of 55 days to less than 20 days.
Improved promotional day-one availability.
100% distribution in stores.
Source: Carrefour, 2005/IGD Research, 2006
Case Study - Procter & Gamble, China
Procter and Gamble has recently uncovered a key trading strategy. Focusing on the
world's fastest growing shopper segment - low-income families in developing
countries - P&G aims to provide value for money products, such as nappies, that are as
affordable as basic food items. Sustainable relationships with large developing
markets like China, Brazil and Russia, will be key to long-term growth prospects for
large, leading international manufacturers like P&G, but it is equally important that
they connect with the lower income bracket household, and not just the wealthy
minorities in those same countries.
In order to deliver that strategy, the P&G invests approximately one third of its annual
research and development (R&D) spending on low-income markets, which equates to
over 1billion, and is double what the company was spending just five years ago. The
company is also reported to have changed its consumer research methodology, its
R&D techniques, and its global production systems to make products cheaply, but
profitably.
Moving from focus groups to 'within the home' studies, P&G found that there were
cultural barriers in some countries like China that were just as relevant as economic
considerations when trying to sell a new product concept like disposable nappies, and
that certain low-income consumers want different product characteristics. For
example, poorer consumers in China were willing to spend more time hand-washing
clothes due to local water hardness, and so P&G now produces a detergent without
water softener, thus reducing costs but still meeting the consumer's primary needs.
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Innovation and manufacturing productivity are viewed by P&G to be just as important
a part of delivering to lower-income markets, providing a much greater return on
products. Cutting the cost of sourcing nappy manufacturing lines by 30% compared to
2002, P&G has combined its proprietary technology techniques with a network of low-
cost suppliers across not only China, but also India, Vietnam and Brazil. This ensures an
efficient technology base which feeds a more efficient production base, making P&G
more effective across all markets, including 'premium' countries.
Source: The Financial Times, 15th November, 2005/IGD Research, 2006
3.2.2 Opportunities in Global Sourcing
The main benefits of transferring production to these countries are:
Opportunities for Global Sourcing
1. Lower wages
2. A large, flexible and well-educated work force
3. High local growth - New markets expand at a quicker rate than more developed markets
(China +8% growth compared to the EU average of +2%).
4. The market for prime materials is already global, and countries have specialised over time so
that companies must act global to reach every production zone. For example whilst China
has focused on garments, hardware and electrical goods, Thailand has looked at food and
plastic products, and India has focused on home textiles, shoes, garments and decoration. This
global reach means that wooden furniture, for example, could have the wood imported from
Brazil, be crafted in Vietnam, but then sold into the EU.
5. Buying directly from the factory on an 'ex-works' basis could bring a margin bonus of
anything from 10-50%, and in times of consistent margin pressures, this is an attractive option
for many companies.
Source: Auchan 2005/IGD Research, 2006
3.2.3 Challenges for Global Sourcing
In contrast, although the costs of transferring production to these countries can be
relatively low, the challenges that international sourcing present are real. With more and
more goods travelling longer distances, and with shelf-life for some high-tech goods now
as little as six weeks, it is no surprise that companies are looking much harder at their
supply chains.
Although total end-to-end supply chain costs remain a key area of focus, companies are
also having to ensure reliability, quality and service levels, as well as ability to react
quickly to changing circumstances. It is important to have a clear picture of total supply
chain costs before deciding which elements of production to re-locate.
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Challenges of Global Sourcing
i. Infrastructure (road, rail and ports)
ii. International Transportation
iii. Inventories
iv. Communication and Planning
v. Administration and Payment
vi. Integrated Logistics Services
vii. Production and Quality
viii. Legislation
i. Infrastructure
One of the major barriers to further economic and social development is infrastructural
limitations, and congestion in trade lanes. Within China, despite a highly developed
environment in major industrial centres (Pearl River and Yangtze River deltas), moving
product can still be difficult because of the vast size of the country, the varied
topography, and the inconsistent transport networks. Whilst there is significant
investment in road and sea-ports, rail is still a problem. The Chinese network is not able
to provide consistent service for large amounts of commercial rail freight, although again
the government has announced plans for improvements.
a. Road
Chinas vehicle fleet remains small compared to other countries in the region: 1.6 vehicles
per 100 people, compared to 2.5 in India, 14.3 in Thailand and 65.3 in Japan (Asian
Development Bank statistics), due to modern vehicles only arriving since the late 1980s
with the first joint-ventures and technology transfer initiatives. Subsequently, with
economic and social development, the demand for vehicles is expected to increase
significantly, and in 2002 there were already three times more vehicles on the roads than
ten years previous.
According to Chinese Government figures, demand for road freight increased by 6.1% a
year over the same ten-year period, faster than the growth of Chinas total freight market.
This growth was encouraged by the deregulation of the Chinese transport industry
following accession to the World Trade Organisation. Most freight operators are small-
scale, but as with the larger manufacturers, most own their own vehicles, and trucks
account for about 35% of the privately-owned vehicle fleet.
However, the challenges of rapid growth are being met head-on, with major investment
projects to improve transport links and reduce congestion to ensure greater efficiency.
Consequently, both roads and harbours are set to expand rapidly. For example, the
motorway network is expected to expand to 35,000km by 2008, with a total road network
of four million kms by 2050 linking primary and secondary cities and eastern and western
provinces.
Following deregulation, entry into the inter-provincial haulage sector has been made
easier. Tariffs are market-driven and privately-owned operators account for
approximately 75% of the industry. However, new road tolls and licence payments
according to the size of the load, rather than the size of the truck, are inflating overall
transport costs.
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Various development agencies are working with China to provide loans for construction,
as well as technical consultancy, planning and policy development, particularly in the
Central, Western and Northern regions of China, where development has been slow and
poverty remains high. So far, the World Bank has provided $6.1 billion and the Asian
Development Bank (ADB) $5.3 billion of loans.
b. Ports
Water transport plays a key role in international sourcing, and most major retailers now
rely on it for primary (supplier to retailer) supply chains. For example, UK ports handle
96% of volume and 75% of value of all goods moved into and out of the UK. The
exceptions include relatively low levels of air freight and the channel tunnel. The global
container fleet capacity is already expected to increase by over a third from 6.6 million at
the end of 2004 to 9 million by the end of 2007.
In response to such growth predictions, ports in the Far East are at the forefront of
capacity development programmes. Shanghai, for example, has been building a new
port, which will take Truck Equivalent Unit (TEU) capacity from 4 million in 2000 to 20
million by 2015, whilst Hong Kong is expected to increase from 17 million TEUs in 2000
to over 25 million. Interestingly, there are 1.5 million new containers being built per year,
and two thirds of these are now also being built in China (Source: Auchan, 2005).
In time-pressured supply chains, there is a need for greater understanding and awareness
between users and suppliers of water transport, who have been viewed by some as being
too slow to react to business needs and a little archaic. However, it is right to point out
that in terms of investment costs and timescales, there are significant differences
between road and water transport. Whereas a new truck may cost $120,000, be delivered
in a few months and be in service for seven years, a new container vessel costs upwards
of $100 million, takes two years to arrive, but will be operating for twenty years (Source:
Chartered Institute of Logistics & Transport (CILT) figures).
ii. International Transport
By producing in countries such as China, companies become more reliant on various
modes of transport to move product around the globe quickly, efficiently and at low cost.
Despite pressures on the industry in terms of labour, fuel costs, legislative pressures, and
infrastructure constraints, the overall costs of international transport have been falling,
and in some circumstances it may well cost just as much to move a truck from Madrid to
Brussels and to transfer a 40 foot container from Shanghai to Antwerp.
Shipping product half way around the world means that companies also need to ensure
optimal shipping loads i.e. that containers are as full as possible, or at least at break-even
point. This means that importers should consider: the total ordered volumes and phased
quantities, the packing, and the packaging type and standards.
Within the importing country, it is equally important to minimise the inland
transportation where possible, often by choosing the closest port to the final destination
point, and within the UK, companies such as the Home Improvement retailer B&Q now
import closer to their RDCs, instead of using the traditional ports in the south of the
country. This avoids putting a warehouse actually at the port, which is not always
advisable due to the number of secondary journeys that would then need to be
undertaken.
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Finally, at a very basic level, with container shipments taking five to six weeks on the
water, sourcing companies must consider the implications of increases in transit time,
particularly in terms of inventory levels and ability to react to changing circumstances.
iii. Inventories
The cost of capital, storage and obsolescence are key factors to consider when sourcing
globally. Longer lead-times means that inventory levels need to increase to cover sales,
whilst accurate forecasting, particularly of seasonal lines, is always a challenge. To
counteract insecurity of supply, safety stocks are often increased. As such, high average
stock holding of core lines of 8-10 weeks stock cover and more is not uncommon for
globally-sourced products.
It is also important to have accurate phasing of deliveries, particularly of seasonal lines,
and ensure that the receiving warehouse is able to take-in the goods at the right time, as
port demurrage and overflow warehousing can be very costly. Companies should aim
therefore to employ 'lean' strategies to avoid the build-up of inventory at the increased
number of storage points that international sourcing brings to the supply chain.
Equally, it is true to say that interest rate levels are historically low in many developed
markets, and there are efficient means of managing inventory commitment through
various buying terms, collection services, shared-user, and consolidation centres. For
example, outsourcing to a third party logistics provider with a vendor-managed
inventory program can bring crucial benefits in avoiding inventory-build-up and
obsolescence issues. Some companies also adopt a 'postponement' strategy, whereby
basic manufacturing processes are carried out in the lower cost country, but then
finishing processes are done closer to the main market, allowing for a degree of
customisation and reactivity. This is shown in the Zara case-study in Chapter One.
iv. Communication and Planning
At the heart of any global sourcing strategy is a need for greater communication
between partners up and down the supply chain at all parts of the process, and this
needs to occur across various time-zones, cultures and languages. Despite often
disparate organisational structures, teams from sales, sourcing, logistics, manufacturing
and inventory planning must align themselves to the strategy.
Poor planning is a key factor in increasing shipment costs, so that experienced importers
will ensure that arrangements with freight carriers are made early in the year for any peak
seasonal activity. Airfreight can sometimes be an option, but for low-value goods, this
could cancel-out any savings made from producing in an emerging economy. New
technologies for product lifecycle management, combined with streamlined
communication, can ensure that production can make changes in design and demand
quickly, thus reducing order cycle times.
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v. Administration and payment
As the supply chain extends, there is a heightened level of administration involved to
ensure that long-distance trading partners and local associates are all kept aware of
developments. Global sourcing also requires knowledge and expertise of international
buying terms and payment types, which brings associated costs and inherent risks.
Shipping documentation has to be accurate, as non-compliance can lead to severe delays
in transportation, including the impounding of goods. Key areas of focus for completing
documentation correctly will include: declared value of goods; correct commodity codes;
and the accurate weight/number of packages.
vi. Integrated Logistics Services
In terms of logistics operations, local firms still dominate in China with around 80% of the
market, many of which are also state-owned. Despite wholly-foreign owned enterprises
now being allowed by the authorities, and many companies now working in China
without a local partner, many foreign companies still choose a joint-venture option. The
joint-venture partner allows the foreign company to gain improved operational
knowledge and expertise in a highly complex, under-developed and often bureaucratic
market.
In order to help manage the longer and more complex supply chain, there is certainly a
growing role for third party logistics service providers who can offer a truly end-to-end,
integrated service, managing collection at origin, port loading, shipping, discharge and
final delivery, including all documentation and queries. For example, in October 2005, Exel
had 22 locations across China, assisting companies expanding from coastal cities to the
interior, as well as the wider East Asia region including Hong Kong and Taiwan.
vii. Production and Quality
With most of the large multiple retailers now sourcing from the Indian sub-continent and
South-East Asia, there is increased competition for product, price, quality and service
level. It has been reported that the Importers and Distributors are fighting back, and
being experts in limited product range, some acquire factories in their core businesses to
ensure continuity of supply.
Whilst companies can disappear as often as they are created, it is important to be
vigilant and to even be wary of over-commitment to a given company.
It would not be uncommon for the customer who promises to pay the most to get the
product, despite agreements to deliver to others.
Equally, once the selling price has been agreed, quality has to be constantly checked,
particularly prior to shipment.
As factories are often over-loaded with orders, delays are also commonplace, and this
can be coupled with power and labour shortages in some regions, for example
Southern China.
Since it can be a challenge to find suppliers who can conform to international quality
standards, it becomes even more important to find a partner that can eliminate
language, geographical and logistical barriers.
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Case Study - Auchan Group, International Sourcing
Auchan Group's Imports/Exports team has implemented a number of solutions to
ensure the smooth flow of mainly non-food, promotional merchandise from the Far
East.
1. On-the-ground presence in the production regions
To source efficiently, Auchan has immersed itself in the country of production. This has
allowed the Group to gain a deeper understanding of the opportunities and
constraints of the market, whilst being able to adapt to the culture and undertake
direct negotiations with the supplier base.
In order to efficiently manage their supply chain, Auchan has chosen to manage locally
all the supply chain partners, allowing for direct contact with the factories, the
inspection companies and freight forwarders. Such close contact affords Auchan the
ability to react quickly and efficiently to unforeseen events.
2. A solid information system
Information management is viewed by Auchan as the primary focus of global sourcing
because accurate and reliable data is imperative to the efficient management of 4-6
month lead-times. The distances travelled, the different time-zones and languages limit
the frequency of direct contact between supply chain partners, and in the case of
Auchan, the products are only touched by the manufacturer, the quality inspection
team in-situ, and the store at the end of the chain.
viii. Legislation
Customs regulations are the most obvious obstacle for any company importing from an
emerging market, both in terms of exit from the producing country and entry into the
buying country. In this way, customs regulations are relatively unstable and are often
subject to interpretation.
From variable quotas, to anti-dumping taxes, and through to erratic import taxes, it is
important to keep on top of developments.
Locally-sourced products can seem a logical option in terms of cost and proximity to
production, but value-add taxes can wipe-out any gains.
In the aim of protecting the European shopper, EU customs are also highly active in
investigating consumer goods imports, and carrying out security and conformity
tests.
In addition to customs regulations, it is important to obtain correct operating licences
and foster smooth relationships with Chinese government officials. There is also an
agreement the Closer Economic Partnership Agreement (CEPA) - between Hong Kong
and China proper, for Hong Kong-registered companies to run wholly-owned operations
in China without the need for a state-owned sponsor.
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Auchan uses an internet-based information system which is accessed by suppliers,
service providers, employees and customers, and this ensures that there is no need for
significant dedicated resource to manage the flow.
3. Strong quality control and customs management teams
As well as the laboratories and inspection companies, Auchan's internal quality team
manages the evolutionary nature of the regulatory framework that governs
imports/exports. For example, Auchan has cited that an MP3 player with a radio may
be subject to a 12% import tax, but if there is no radio it is only 2%. Auchan uses third
party inspection companies, to carry-out in-situ inspections in the production regions
around the world. Auchan views strong quality management as a key part in ensuring
lead-times remain as reliable and as short as possible. Expertise in quality control and
inspection guarantees compliant products, from a customs perspective, as well as
products that satisfy shopper expectations and needs.
Secondly, the customs teams within Auchan manage the arrival of goods into the
receiving country, and the associated administrative burden. Tax and duty declarations
and payments represent a significant part of the overall costs, and as Customs have the
power to block an import/export at any time, it is important to ensure that errors are
kept to a minimum.
4. Strong logistics and finance teams
Auchan's logistics team manages the forwarding and transport operations, and this
activity is two-fold:
Global sourcing requires multiple partners around the world and their remote
activities need to be efficiently synchronised.
Optimisation of the transport chain for cost efficiencies, including price and
contract negotiations, container loading, and handling processes and procedures.
For example, Auchan has quoted that flat-packing t-shirts can allow 100 units to be
packed into a carton, thus 33,000 units per container, whereas if the same t-shirt was
round packed (for enhanced in-store merchandising), there would only be 24 units per
carton, and only 22,000 units per container, at 50% more cost in transportation.
The Finance team at Auchan, on the other hand, works to guarantee efficient payment
terms, and their expertise is vital due to the variety of currencies, the currency
coverage, the various payment terms, and the multiple means of payment, including
letters of credit and transfer payments, that are an inherent part of the global sourcing
process.
Source:Auchan, 2005/IGD Research, 2006
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3.3 India Retailing Opportunities
Key Points to Note
The scale of the Indian market and the remoteness of much of the population
present a real challenge to both manufacturers and retailers alike.
Current Indian legislation restricts multi-brand retailers from investing directly in
the market and opening their own stores. Those that are present have entered the
market through opening cash & carry outlets.
Due to the unorganised nature of the Indian retail market, distributors and
wholesalers are key links in the Indian supply chain, with very little centralised
distribution.
The quality of the physical infrastructure in India is well below that enjoyed in
China, where government investment has been highly managed, but
improvements are coming.
The scale of the Indian market can be summarised by the fact that there are
approximately five million distribution outlets. The country has the second largest
population in the world with just over one billion people, 50% of which are under the age
of 25. With average Gross Domestic Product (GDP) growth of +6% over the past decade,
India's consumer middle-class is expanding rapidly. As a result, Indias retail sector is set
to rapidly increase.
The challenge for any international manufacturer will be getting their product (and
brand) out to the rural areas, in order to tap into the mass market. For the international
retailer, the challenges are slightly different, mainly because Foreign Direct Investment
(FDI) into the Indian retail scene is currently restricted. The Indian government has
however just announced plans to ease the restrictions for single-brand foreign retailers
to own up to 51% of businesses in India as long as they only sell their own brands.
Currently, modern retailing is therefore not widespread across India.
Subsequently, the 'unorganised' nature of the vast majority of the Indian retailing scene
(97%), where most customers shop in local wet markets for fresh fruit, vegetables, meat &
fish, and neighbourhood stores called 'Kiranas' for their dry goods, means that supply
chain management in India is heavily reliant on hundreds of distributors.
3.3.1 Distributors
These intermediaries purchase stock from the main branded suppliers, such as Heinz,
L'Oral, Unilever, or Colgate-Palmolive, and then deliver the range of products either
direct into the retail outlets, or via the wholesale networks. Even within the limited
'organised' retail sector there are only a few direct deliveries into store by a manufacturer.
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Choosing a Distributor
When choosing a distributor, a manufacturer would be looking for the following qualities:
Financial security
Ability to serve the fragmented retail structure
Influence in the region/city, driving new business opportunities
Distribution Network in India
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Whether the retail outlet buys from the distributor or the wholesaler will depend on if
they can get the full range of products they require from one single source.
3.3.2 Sales Field Force
The distributor companies have a number of sales people who call on the retailers once
a week. They conduct: the physical distribution of goods, and collect money from retailers
for the goods. There are two distinct roles for the sales force:
1. Order-taking - the salesman will take an order from the retailer, which will then
usually be delivered the next day
2. Direct sell - the salesman has a delivery vehicle, and sells directly to the retailer from
the truck. This is particularly common in smaller towns
The type of role will simply depend on the viability of the method, in terms of ranging,
volume and even ease of access to the retail premises. It is not uncommon for
manufacturers to have their own field sales force. Due to the lack of modern media
coverage, direct contact with customers in the more rural areas is essential for building
brand and product awareness. The retailer will often receive seven days' credit before
they have to pay the distributor for their stock purchase. Retailers and suppliers are not
tied to a particular distributor, but can choose these freely.
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The need for high delivery frequencies - due to little storage space - means that the local
distributors are often essential to the continuous supply of goods. Although there will be
some direct delivery accounts to the more developed retail stores, typically, an average
retailer could be serviced by 30-40 distributors carrying the manufacturers' brands. This
complexity impacts on delivery waiting times, which can be anything between four and
six hours!
3.3.3 Legislation
The manufacturers sell on a 'cash and carry' basis, where the distributor pays up-front for
the stock they take. Suppliers will usually have a Carrying & Forwarding Agent (CFA) in
each individual state to manage the sales to distributors, paperwork and the tax
implications. Generally, there is a tax applied by the central Indian government when
products change ownership and are sold into another State.
This means that suppliers will generally move product from their centralised production
facilities out to any number of out-lying co-packing/storage facilities, or sub-warehouses
(usually one per State), where stock will then be sold to the distributors. Since ownership
of the merchandise has remained with the supplier, there is no tax penalty on the
physical movement. The only exception to this type of network structure is if the costs of
running the out-lying warehouse are greater than the 4% sales tax that would be
imposed.
Implications
Optimisation of warehousing within the Indian supply chain, with a degree of
centralised distribution, will only really be viable when the tax burden for moving
goods between States is abolished. This will not only allow large-scale manufacturers
to consolidate their networks across geographies, but also consolidate demand and
supply flows into the retail network.
In addition to 'movement' taxes, there are a number of other financial taxes and laws
which add complexity into the system:
i. Maximum Retail Price (MRP) - Each product sold in India is required to have its MRP
stated on the packaging and it is illegal for the product to be sold above this price.
This price is set by the manufacturer and serves two key purposes. Firstly, it ensures
that the consumer is not over-charged for the product. Secondly, the price determines
the level of tax collected by the government. Retailers can sell below the MRP,
although this is difficult because margins are generally very small.
ii. Weights & Measures Act (1977) - which stipulates manufacturer pack sizes, so that
the consumer can compare, and which product categories can attract tax on top of
the MRP. Most products already have tax included in the price.
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Inventory Challenges
Description Result
Crowded back-of-store
Difficult to check
Improper rotation
Damages
Low levels of self-service
Low stock visibility
Availability will generally be poor,
particularly for new product launches.
Low product/brand visibility.
Customer needs to know what they want.
iii. Ingredients - there are a number of legal requirements for ingredient lists on
products.
iv. Value-Added Tax (VAT) - this was introduced in April 2005, and is a common rate
across the country, but only 20 of the 29 Indian States accepted its implementation.
v. Packaging - Manufacturers need to ensure that price promotions are marked on
printed packs (cross-out packs), as otherwise they could pay tax on the full sales price.
For this reason, promotions are often run nationally, or some suppliers only run multi-
buys in banded packs.
v. Minimum Wage - This is set by region and by profession by both the national
government and the state. It can change every six months. There is high demand for
skilled labour, and with many available jobs, people are open to change employment.
This means there is pressure on wage costs, although still account for a relatively low
proportion of total costs, compared to more developed markets in Europe.
3.3.4 Inventory Challenges
Due to the complexities in the Indian physical supply chain, effective inventory
management can be a real challenge for the supplier and retailer in servicing the end
shopper.
3.3.5 National Brand Coverage
India is undoubtedly a vast country, and whilst the whole country is populated,
consumption will be fragmented. Mumbai itself supports a population of over 16 million
people.
Strong brands are offered across much of India and into the majority of rural locations,
but full coverage will depend on the geography, local consumer preferences, and even
company heritage in some areas. The wholesale network can be used, at a price, by
suppliers to reach more out-lying areas.
The south of India has been a traditional entry point for companies, and is helped by a
better road network and lower real estate prices. The biggest challenge for suppliers is to
generate new products, particularly those adapted to the lower purchasing power of the
majority of the Indian customer base, whilst also abiding by the legislative restrictions.
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3.3.6 Infrastructure Challenges
Despite similarities with China in terms of country size, population, the extent of global
sourcing activity, and their rapidly developing economies, it can be argued that India is
approximately five to ten years behind China in terms of the modern retail environment
and supply chain infrastructure. As highlighted in the previous section, infrastructural
and investment development in China have been heavily managed and controlled by the
Chinese State, making sure that a certain degree of infrastructure was in place before
inviting FDI.
This has not been the case in India, where space, transport and retail planning and
building continues to be rather haphazard. Transportation, road and rail infrastructure,
quality of trucks, general congestion makes movement of goods very difficult between
cities and regions, bringing high levels of uncertainty into the supply chain.
Subsequently, large quantities of food do not reach the market.
There is strong demand outside the major city conurbations, and the real challenge now
is getting products into the rural interior. The relatively poor infrastructure means it is
better to store goods closer to the market, hence another reason for the proliferation of
warehouses across states.
Modes of Transport
Road transport predominates, despite the inadequacies of the network
There are no domestic cargo airlines, and landing rights are very expensive for aeroplanes
Rail is used for container traffic, and can be supported by a government agency (CONCOR)
3.3.7 Delhi versus Mumbai
Despite having legacy infrastructure across the seven islands that have been joined
through land reclamation, congested roads and limited space, Mumbai remains the
commercial centre of the country.
Delhi, in contrast, has more available space due to its circular structure, and has received
much government investment due its capital city status. It is also a government centre,
and it is reported that 70% of people living in the city are government officials. The city
has bigger, wider roads, has a Metro, and is cleaner and less congested than Mumbai.
Many companies have moved out of the city centre into the 'greater' Delhi geographic
area where development parks have been created.
3.3.8 Supply Chain Improvements
It is therefore fair to say that vast improvements have already been made, as India looks
increasingly to Europe and USA. The logistics sector is not restricted and so many foreign
operators have moved into the Indian market. As with China, this often occurs via joint-
ventures, giving time to adapt to the new market and learn how to do business in this
complex developing market.
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Implications
1. Many leading international manufacturers find the Indian market very challenging.
Those that dominate the market have been in India for a long time, and have
adopted their business processes to the cope with the complexities of this highly
fragmented market.
2. Return-on-Investment will not come immediately, and so companies investing, or
looking to invest, in India need to be patient, and be prepared to 'sit-out' the
current market complexity.
3. Current rules on retail FDI may well change further over the next six to 18 months,
but recent changes only apply to single-brand retailers, thus still restricting entry
for most large-scale international retailers who sell many brands.
Customs procedures have been modernised, import/export tariffs have been lowered, as
well as the introduction of technology, such as EDI. One of the biggest challenges is the
cold chain, where there is a tendency to turn off refrigeration, in transport and in-store.
Retailers and manufacturers expect international logistics service providers to reduce
uncertainty and manage the supply chain safely and efficiently, and some leading
companies are willing to pay for that security and quality. For example the use of
temperature monitors inside refrigerated vehicles.
The Indian government has encouraged private investment in the transport
infrastructure. This has taken the form of multi-lane highways, thus reducing traffic
congestion and journey times considerably. For example, the 160km journey between
Puna and Mumbai has reduced from 4-12 hours to only 2.5 hours. There has been the
introduction of road tolls too, which helps bring a level of certainty to the supply chain,
and can also help reduce labour costs because deliveries take less time.
3.3.9 The Future
Whilst the Indian retail market is still in the early stages of development, there are clear
signs that the sector is on the brink of significant change. It is widely anticipated that the
retail market will continue to open up to foreign direct investment over the next six to
eighteen months which will lead to the entry of international retailers such as Wal-Mart
and Tesco.
The development of the retail sector is intrinsically linked to the development of the
supply chain which currently requires a significant level of investment from both the
State and private sector. Sufficient investment is however unlikely to take place until the
largest retailers have adequate scale to justify the cost. Those who take the initiative to
develop efficient logistics operations will inevitably gain the competitive advantage.
As the market develops and the expectations of modern retailers and suppliers increase,
an element of consolidation is inevitable nevertheless, IGD anticipates that in the short to
medium-term, the network of distributors and wholesalers will continue to dominate the
market.
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3.4 Central & Eastern Europe Supply Chain Restructuring
Key Points to Note
Similarly to China and India, as a result of significant political change, and the
subsequent high levels of economic growth, the countries of Central & Eastern
Europe have also become attractive places to invest, in terms of both
manufacturing production and international retail expansion.
The advantages of countries such as Poland, the Czech Republic and Hungary, are
that they benefit from cost-effective labour and a culture of hard work, but without
the long transit times for delivery.
There has been growth in logistics movements, inter-modal activity and
investment in transport and warehousing infrastructure.
Consolidation in the supplier base is encouraging more collaborative practices,
both between suppliers and with retail customers.
At a European level, a combination of political and economic changes over recent years
has lead to surges in activity in once more remote countries. The growth of the European
Union has accelerated the presence of leading consumer goods manufacturers and
retailers in countries in Central and Eastern Europe, like Poland and the Czech Republic.
Production capacity is also moving eastwards, or is being outsourced to contract
manufacturers already established in the region.
3.4.1 Supply Chain Advantages
Whilst some of the countries in the wider region are now part of the enlarged European
Union, all are believed to benefit from cost-effective (as opposed to cheap) labour, a
culture for hard-work, and above all, shorter lead-times for delivery into Western Europe
when compared to their Asian competitors. Combined with generally positive
government attitudes to foreign investment, (sometimes with attractive subsidies), and
continued strong economic growth, Central and Eastern European countries are an
attractive emerging market. It is fair to say though that it is not all 'plain-sailing, as shown
by Poland's recent opposition to further hypermarket growth, despite foreign
supermarket chains creating 160,000 jobs in Poland since the 1990's.
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3.4.2 Supply Chain Trends
As more cost-effective manufacturing locations are identified, and modern retailing
grows in a larger consumer market, there is increasing demand on the responsiveness of
the supply chain. As such, air, sea and road freight throughout Europe continues to grow.
In response to the ever-growing trend towards global sourcing and the level of direct
imports from Asia, there have been major up-lifts in port activities throughout the region,
particularly in Odessa (Ukraine), Constanta (Romania), Trieste (Italy), and into Turkey.
There has also been a reported change in the direction of goods movement, from the
historical east-west axis to increasing levels of north-south activity, particularly via
accession countries:
Polish suppliers have been transporting more goods to Greece than their traditional
German markets
Hungary is moving large quantities of products up to Poland and the Baltic States,
partially in response to developing fashion and home improvement markets in
former Communist countries.
Examples of Central & Eastern European Growth
Retailers
As part of their 'asset-swap', Tesco has recently acquired 11 stores from
Carrefour in the Czech Republic, as well as plans for taking another four
stores in Slovakia. The French retailer is taking over Tesco's six stores in
Taiwan.
In contrast, Carrefour currently runs approximately 100 stores in Poland,
including 12 hypermarkets bought from Ahold last year. The group has
announced plans to double its number of stores over the next five years,
particularly in smaller towns.
Auchan has announced plans to open a further five hypermarkets in the
Moscow area of Russia, adding to the seven stores it currently operates.
Following its expansion into Slovenia, the German discounter Aldi has
decided to move into Poland, with plans to open its first outlets in 2007.
Manufacturers
The confectionery firm Leaf UK - makers of 'Chewits' sweets - has
announced plans to close their factory of 40 years in the north of the UK,
and move production to Eastern Europe, citing the need to invigorate
production capacity and cost costs.
Cadbury Schweppes - the world's second biggest chewing gum
company with 26% market share - will invest 70m in building a new
chewing gum factory in Poland. The site will be operational by 2008.
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There are, nevertheless, a number of challenges to overcome, not least of which are the
years of under-investment in the transport infrastructures. Again there are regional
differences, with countries like Hungary and the Czech Republic in a better position than
poorer and larger countries like Poland.
Similarly, warehousing facilities can vary considerably in quality, but new investment in all
of these areas is rapidly improving the situation. The development of efficient and
capital-intensive infrastructures will help ensure competitiveness through improved
service-levels and shorter lead-times, which will help off-set higher labour costs.
The following three case-studies show how Tesco, Henkel (a leading manufacturer), and
Carrefour have improved their supply chains in Central & Eastern Europe, through
restructuring their business model, changing the flow of goods through the supply
network, and working closely with the local supplier base.
Case Study - Tesco, Hungary
Market Summary
Tesco entered Hungary through the acquisition of Global and currently has nearly 70
stores with a sales space of 3.5million sq.ft. Tesco is the clear market leader in Hungary
and is the only international retailer that has full national coverage. With a multiformat
operation, it has established hypermarket and supermarket operations and recently
has extended into smaller urban areas through the development of compact and
petrol station formats.
Tescos largest store in Europe is located in Budars, Hungary (outskirts of Budapest) and
has a total store area of 16,000 sq. m.
Delivering a Supply Chain
The development of their store network is supported by a growing supply chain which
has been steadily moving from suppliers delivering stock directly to store towards a
centralised distribution model.
Tesco, Hungary
Source: Tesco, Budaors, Hungary, IGD Research 2005
Our objective is to centralise 80% of all product volume by the end of 2006 and
operate as a profit centre.
Through centralised distribution, Tesco can reduce the amount of stock held in the
back of store. This enables simpler operations and better in-store processes, leading to
improved consistency and availability of the product offer to shoppers. Its current
network comprises of the following depots:
Herceghalom, 43,000 sq m, ambient (dry grocery and hardlines)
Budafok, 10,000 sq m, non-food
Gyal, 25,000 sq m, fresh and chilled
Across the past five years, Tesco has steadily improved its supply chain in Hungary:
Centralised more non-food volumes (aided by the sortation system in
Herceghalom
Closure of an old site and opening of a new purpose built centre
Centralisation of fresh food volumes
Implementation of service level improvement programmes
Extension of existing site to accommodate extra ambient and non-food
volumes
Completion of Electronic Data Interchange volumes (EDI)
Bought depot management control in-house
Controlling more product at source e.g. moving from a locally sourced model to
a internationally sourced model for produce.
The fresh food DC in Gyal has resulted in 98% of fresh being centralised in 2005
Value of Radio Frequency
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Spotlight on Herceghalom
Herceghalom was the first of its kind in Central Europe, having been developed
within nine months and opened in June 2002. It has a capacity of 36,000 pallets and
6,500 pick locations. With the addition of a cross dock sorter, Tesco can handle an
additional 20,000 product lines. With a capacity of two million cases it has led to
75% of its grocery volume being centralised as well as 50% of the hardline items.
It changed from a paper based warehouse operation to a state of the art paperless,
fully radio frequency controlled warehouse. Making it one of the most advanced
depots in Central Europe.
Benefits Offered Challenges to overcome
Stock movements recorded as it happens
(real time)
Fast - response time is less than one second
Accuracy - reduced number of errors
Efficient - paperless processes now in place
e.g. no picking lists
Mobile - can be used all over the warehouse
Following less flexible processes (need to
more prescribed for RF)
Discipline - everything must be scanned
Training - to enable technology to be utilised
Maintenance - for hardware
Dependency on system requiring first rate
support
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Future Outlook
Overall Tesco has made great strides in applying best practice into new markets and
Hungary now has some of its most up to date depot networks. In Tesco UK terms, the
operation has advanced 15 years in the space of 18 months. Reduced cost per case has
been driven through transport efficiencies through better economies of scale.
Going forward the two key challenges facing Tesco are finding the right model for
international/global sourcing; this will in turn define the supply chain infrastructure
needed. Secondly, centralisation of product volumes across a region; Tesco has been
successful in implementing centralised distribution within a country such as Hungary
but what about across Central and Eastern Europe?
Across 2005/2006, Tesco has embarked on the development of distribution depots
across Central and Eastern Europe.
Poland Opened a fresh food depot in 2005
Slovakia Opened two depots in 2005
Czech Republic Plan to open two depots in 2006
With ambitious international expansion plans, Central and Eastern Europe is seen as a
key element to support this strategy and Tesco will continue to invest in a first class
distribution infrastructure.
Source: IGD Research and Tesco, 2006
Case-Study - Henkel in Central and Eastern Europe
The Business
Within Central and Eastern Europe (CEE), Henkel has a headquarters production site in
Vienna. As part of a ten-year supply chain restructuring programme, which has
included a 448m investment in the region, Henkel CEE now employs over 7,000
people and achieves 85% of its total turnover in Central and Eastern Europe. This
transformation has made Henkel CEE the number two detergents player and market
leader in adhesives and hair cosmetics in Central and Eastern Europe.
The Challenge
Following a decision to put production, supply procurement and sales under one
single management structure, Henkel CEE has reduced inventory levels by 50% within
two months, through an integrated, process-orientated, end-to-end supply chain
approach. These immediate benefits acted as a catalyst for wider business support for
the rest of the re-structuring project. The ability to re-structure the business in such a
radical way was also helped by the small size of Henkel's CEE business, relative to that
in Western Europe.
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Henkel CEE changed more than 50% of the management structure to ensure the new
team supported the radical new plans, and also introduced new systems and new
demand planning tools to establish supply chain priorities. The change process is slow,
as the business must continue to function, but a responsive service-led supply chain is
at the heart of the new approach. With high revenue growth in countries like Russia,
where there are three detergent production facilities, Henkel CEE continues to face
logistics, sales and marketing challenges due to the size of the country and the
deficiencies in infrastructure.
Network Restructuring
With 19 warehouses and 10 production plants in the Central and Eastern European
region, there is now a clear long-term vision to review this network, so that production
and warehousing are placed together. In the past, production facilities were often
acquired by chance, and the warehouse location was determined by price. Although
products and brands can be common across many markets, shopper behaviour can
vary. In this way, Henkel CEE aims to move from a country-level organisation to regional
clusters, creating supply regions based on shared consumer behaviour. Henkel CEE
aimed to open its first cross-national warehouse, supplying four countries from one
single location, at the end of 2005.
Supplier Collaboration
As part of their supply chain re-structuring programme, Henkel CEE relies on a
proactive, well-managed supplier-base, where service is said to be more important
that price. Key areas of focus include: inventory management; close communication;
location and quality. In terms of management of excess supply chain stocks, Henkel
CEE wants to use suppliers capable of vendor-managing their relationship. This has not
always been possible, especially with some local suppliers who benefit from good
location and good prices, but are not in a position to manage all the technology
systems, and so Henkel has created a mixed system in the region.
Supplier Consolidation
Acquisitions of suppliers have also been strong within the new accession countries,
thus creating a certain degree of supplier concentration. Whilst Henkel wants to be
able to flex its purchasing power by using smaller companies, it does not want supplier
dependence, and wants the supplier relationship to be strong, so that negotiations
around service can be productive. In this way, Henkel CEE has not actively sought to
reduce its supplier base, despite a strong push within the industry. Whilst it is accepted
that a more focused supplier-base can bring advantages, it is not a key focus for
Henkel, who prefers to focus on technology-based tools that can simplify the
processes of dealing with many suppliers.
Competitor Collaboration
Johann Seif, Vice-President Supply Chain Management Henkel CEE, believes that
companies who have sought multinational organisations who can offer global supply
have re-shaped the market, leaving only suppliers who can handle the huge volumes
involved. The concentration has changed the balance in purchasing power. With this in
mind, there is talk of more vertical integration, with Henkel CEE producing materials
on their own, or in collaboration with competitors. Although internal integration from
plant to the customer to deliver efficiencies is the primary focus, it is accepted that
closer collaboration with competitors will be of greater importance in the future.
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Supply Chain Visibility & Flexibility
In a promotionally-driven market, there is a requirement for total supply chain
flexibility, as production cannot work to standard delivery times. Henkel CEE has
reduced its production cycle from one month to only two days over the last five years,
with twice-weekly planning. Henkel CEE now plans to outsource the making of
promotional materials, with a 24-hour supplier response. This would not be possible
without complete supply chain visibility, and Henkel CEE aims to give suppliers full
access to their production programme. In exchange for this level of integration, Henkel
CEE requests invoicing once per month, instead of per truck delivered, putting pressure
on Henkel's own supplier-base, but also ensuring quality service.
Western Europe
Breaking down block structures working within national boundaries will now be the
focus for re-working the business in Western Europe, including the location and
number of both production and warehouse facilities. With limited detergent sales
growth expected in Western Europe over the next year, even more emphasis is placed
on improved supply through leaner structures and greater synergies. As processes are
simplified and transparency increased, borders will be opened further.
Source: Interview in 'Supply Network', June 2005/IGD Research, 2006
Case Study - Carrefour (Poland) Multi Cross Dock
The Business
There is only one Carrefour warehouse in Poland, receiving many direct deliveries from
suppliers and so Carrefour wanted to combine orders to optimise truck fill and reduce
inventory at the Carrefour warehouse.
The Process
Following 3-4 month negotiations, Carrefour wanted to move from individual
direct 1-to-1 picking flows to a 3-to-1 cross-dock flow through a common
warehouse.
Both warehouses are managed by the same logistics service provider - FM Logistics
- for the three suppliers involved in the project: Danone, Masterfoods and Cadbury.
Orders are picked for cross-dock and then pooled for delivery to Carrefour's
distribution centre.
One range of fast-moving products from Masterfoods has remained in pick to
ensure full-truck optimisation, whereas other lines are being cross-docked.
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Results
Delivery frequency is identical for stores at five times per week.
Truck fill rate has increased from 50% to 85%.
Out-of-Stocks (OOS) have reduced by 50% for two suppliers and remained stable
for the third.
Total inventory (RDC and stores) has reduced by 40%.
Total costs have reduced.
Source: Carrefour, 2005/IGD Research, 2006
4. Best Practice Supply Chain Management Managing International Supply Chains
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4. Best Practice Supply Chain Management
Summary
IGDs international survey asked companies for details on their performance and
best practice methodologies, in order to understand the diversity in measurement
tools and the role of external information in bringing internal improvements.
Transferring best practice across departments, markets and geographies is a key
method for driving international efficiencies and improving end-to-end
capabilities, but this should be done in a simplified and standardised way.
Key supply chain performance measures focus primarily on: availability, forecasting,
service levels, order fulfilment, financial indicators, warehousing, transport, and
inventory. Order fulfilment is the most common performance measure.
External benchmarking is gained primarily from the retail customer sharing
information on cross-supplier performance, and is often based on order fulfilment
and availability. In addition, there are a variety of other methods used by
companies, including the ECR Scorecard, industry bodies, and external consultancy
firms.
Root cause analysis of good performance is most likely to be shared around a
business via internal reporting methods and communication processes, including
collaborative work between trading partners. Improved use of data, greater internal
and external communication, and focus on inventory management and forecast
accuracy are all key factors in improving overall performance.
In terms of transferring best practice around the business, there are differences
between organisations, from more formalised methods engraved in organisational
structure, such as global management roles, through to more informal methods via
multi-discipline project teams. In this way, the key enablers for supply chain best
practice are people and processes.
There is a number of standardised continuous improvement techniques used
across the food & grocery sector, particularly amongst the supplier base. The
production environment lends itself to process re-engineering techniques, total
quality management initiatives and lean methodologies. Process management is
the most common method employed by the international companies surveyed by
IGD.
Finally, IGDs supply chain survey asked companies to choose a best-in-class
company retailer, supplier and service provider. Amongst others, companies most
admired by the Supply Chain Executives included Tesco and Procter & Gamble.
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One of the principal mechanisms for driving international efficiencies and supply chain
leverage across markets is to ensure that what works well is widely known and shared
around the business, across departments and geographies. The efficient and effective
transfer of best practice throughout an organisation in an organised and structured way
can be a key enabler for companies aiming to drive the large-scale implementation of
best-in-class supply chain solutions.
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Supply Chain Performance Measurement Matrix
Availability
On-shelf availability (OSA)
Items out-of-stock (OOS)
Stock availability
Supplier/Wholesaler availability by
SKU
Forecasting
Forecast accuracy
MAPE (Forecast error)
Conformance to manufacturing plan
SKU forecast accuracy
Sales forecast accuracy
Service Levels
Customer service
Supplier delivery performance
Service levels
Order Fulfilment
On-Time In-Full (OTIF)
OTIF (All costs)
Case fill rate
Order fill rate
Inventory
Inventory management
Stock-holding
Stock turnover ratio/Forward weeks'
cover
Working capital (Inventory values)
Warehousing
Pick Accuracy
Pick Rates
Cost per case
Handling costs per m3
Cost per pallet
General Financial
Supply chain costs as a % of net
sales
Lost Sales
Invoice accuracy
First-time invoice acceptance
Low code sales
Cost savings
Cost per unit delivered
Cost vs. volume vs. turn-over
Profitability vs. cost
Transport
On-time deliveries, late deliveries &
delivery windows
Drop-size
% of direct delivery
Vehicle utilisation
Load efficiency
Distribution cost per case/m3
Cost by kilometre
Other
All components of the 'perfect order'
SKU complexity
Waste/Write-off
Non-quality costs
Lead-time achievement
Time/Speed to market
Information efficiency
Distribution build
Cost of production of best quality
product (which is different for
different regions)
4.1 What Unit Measure of Performance Do You Benchmark?
Recognising the diversity of markets, customers and organisational structures of many
international companies, and the complexity that this can create for the effective
management of the complex supply chain, IGD asked the Supply Chain Executives to
share the key performance indicators that are used for benchmarking purposes within
each of their organisations.
The aim of this exercise was to examine the scale and diversity of the methods used
across international companies to measure success and ensure the right balance
between service and cost. Subsequently, in response to the diversity of responses, IGD
has grouped the variety of performance indicators into nine different themes:
availability, forecasting, service levels, order fulfilment, general financial, inventory,
transport, warehousing and other.
Whilst some companies listed a number of major performance indicators often across
a wide range of supply chain links (availability, financial, order fulfilment and transport, for
example), other organisations were more restrained in their response. Although there will
no doubt be many performance indicators used across any one business, it is true to say
that on-time in-full and case fill rate were the most commonly cited. These units of
measure are specific to order fulfilment, and measure the degree to which a given
replenishment order has been completed and delivered, in full to the customer.
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IGD 2006
Whilst accepting that certain commercial targets will differ both internally and externally
to an organisation, if there is not transparency of expectation and clear communication
of needs, then the supply chain will ultimately fail, or efficiency is much impaired.
Standardisation and Simplification
IGD believes that one of the main challenges for improving supply chain management and
driving greater efficiencies is for companies to be able to standardise and simplify their
performance measurement both internally and externally.
1. When operating in a variety of countries, and especially when using a number of different
service providers, it is essential for any company to be able to report on the same data, and
benchmark performance across companies, departments, and markets.
2. It is also important that the key performance indicators are aligned between both the
supplier and retailer. If the ultimate aim of the supply chain is to ensure that the end-
consumer is able to purchase the product they wish, in the right quantities, at the right
price, and at the time of their choice, then it is essential for all parties in the chain to
collaborate and work towards the same performance goals.
The first step to improving supply chain scale efficiencies across the international
organisation will be to ensure that data is measured in the same way and that it is shared
widely across all stakeholders.
From rather generic units of measure such as service levels or inventory
management, companies also cited very specific targets, such as quality costs, costs per
case/unit/m3/kilometre, and delivery timings/windows. The emphasis on transport
performance indicators highlights the strict focus within the food & grocery industry on
reducing waiting times, increasing vehicle fill, and running the most efficient network.
111 IGD 2006
The retail customer plays a key role in providing data to manufacturers on their
performance. Sometimes this information will be for several suppliers, often in the same
category, so that the supplier can benchmark across their competitors. The most
common measures, similar to supplier internal measures, are On-time In-full,case fill rate,
and various availability data.
4.2 External Benchmarks
In addition to the internal key performance indicators, IGD asked companies to provide
information on the external units of measure that help with performance benchmarking.
The role of the retail customer, external management consultancies, and other industry
bodies play a key role in this process, but it is fair to say that some organisations do not
use any external benchmark in their supply chain.
External Benchmarks
Customer Industry Body/Expertise Other
Customer OTIF
Customer tables or service
level reports, comparing
with peers
Retailer KPI's
Retailer availability data
Case fill rate (shared by
retailers)
External consultants x3
IGD
ECR Scorecard
ELUPEG forum (inter-
company comparisons)
Nothing concrete - based
in international experience
Tendering
In-market distributors
None
112
IGD 2006
4.3 Availability
Due to increased complexity, the risk of a product not being available onshelf increases
as the product moves down the chain, closer to the end shopper. The challenge of the
now infamous last 50 metres will mean that often an on-shelf availability performance
measurement can vary considerably from the in-store performance measure.
To benchmark total supply chain performance for availability, it is important to make the
distinction between warehouse-availability, store-availability, and on-shelf availability.
If the product is not making its way to the shelf from the back-of-store, then the whole
supply chain is not performing to its best. Depending on the category, the shopper may
well switch brands, postpone the purchase, or even change store, in which case both the
manufacturer and retailer can lose a sale.
113 IGD 2006
4.4 ECR Scorecard
In terms of external benchmarking tools, the ECR scorecard was created for collaborative
performance management, and is completed separately on-line by both trading partners
against an agreed set of key performance measures.
There is a vast array of criteria that could be used in a scorecard, and so it is important for
companies to select the targets that are most business-critical to the relationship, re-
emphasising the point that it is important for both customer and supplier to be aligned
in their benchmarking process.
Before approaching a retail customer with a collaborative scorecard, it is advisable for
suppliers to become familiar with the technique and score their own business internally
first. This ensures familiarity and clarity with internal performance weaknesses, which can
then be improved, before being scored externally by the retail customer.
How do I implement a collaborative scorecard?
Week1 - Meet between Customer and Supplier to explain the principles
Week3 - Supplier completes scorecard on-line
Week4 - Retailer completes its version on-line
Week5 - Discussion over variances in ratings
Week6 - Meeting to discuss the outcomes and business plan.
Progress is monitored by setting 1,3, & 6 month targets for improvement
Please note the above timescales are indicative of the entry level scorecard. For more
information, visit www.globalscorecard.net.
ECR Scorecard Process
Source: ECR
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IGD 2006
Root Cause of Success
Examples
Reporting & Communication
Regular feedback sessions with cross-departmental discussions on performance
measurements achieved
Monthly reports on changes (e.g. average number of deliveries vs. 'outers' delivered)
In-store availability (via the retailer)
Service levels, cost control, historic performance trends
Joint work with customers and between the various internal supply chain stakeholders
Analysis Tools
'Pareto Analysis' for all issues, solve the issues, and then start over
Scorecard
Break-down all links in the supply chain, and measure separately (e.g. product availability,
picking errors, transport failures)
Visibility of real cost drivers and learning how to control them (Activity-Based Costing - ABC)
Other
External consultants
The most common methods for understanding the root causes of success, but also the
reasons for failure, are based on communication and reporting of performance. It is vital
for companies to share performance data and review what happened. It is only through
reviewing the process with all stakeholders that further improvements be made.
Review and Share Performance Data
1. Data should be shared internally to avoid the negative effects of 'silo' mentality, where
departments ignore the impact they have on other teams.
2. Performance data should be shared externally with the customer to ensure that
performance targets and expectation are aligned.
It is true to say, that in any planning process, it is often the 'review' stage that is delayed
or forgotten, as businesses focus on the operational demands of the 'here and now', and
plan for future activities.
4.5 How do you Analyse the Root Cause of Success?
As a result of the variety of methods of root cause analysis cited by surveyed companies,
IGD has grouped them into three main types. Those based on reporting and
communication, those that are more analysis-based, and other types.
115 IGD 2006
How do you improve performance?
1. Improved communication
2. Better utilisation of existing data
3. Increased focus and effort
4. Forecast accuracy (increase accountability for forecasts given)
5. Inventory levels (exit strategy for ageing product lines, monitoring of stock levels)
116
IGD 2006
4.6 How Do You Transfer Improved Performance to Other
Parts of the Business?
Once best-practice and performance success has been identified, it is important for
companies to be able to transfer that knowledge to other parts of the organisation, thus
driving more integrated operational capability. IGDs international survey therefore asked
companies about their current methods for performance sharing.
Methods of Performance Transfer
Note - companies can choose more than one method
4%
9%
13%
15%
24%
26%
28%
48%
52%
0 10 20 30 40 50 60
Share of use
Inter-company forums/conventions
Participation in multi-unit task teams
Rotation of personnel between units
External conferences and presentations
Organised periodic visits to other units
Specialised audit teams
Other
Industry-wide databases of best-practice
Newsletters/video-films
The above chart shows that the most common method for transferring performance
information and best practice is through inter-company forums or conventions, where
different parts of the business can meet, up-date and exchange knowledge and
information. There is also widespread support for the use of multi-functional project
teams and the rotation of personnel around the business.
4.6.1 Formal and Informal Methods
In addition to the methods listed in the chart, other methods of best practice transfer
range from formalised roles embedded in organisational design and structure, through
to much less formal methods:
117 IGD 2006
Formal & Informal Methods of Performance Transfer
Formal
Informal
Global Roles Some organisations have global roles, with
accountability for developing, spreading and training
best practice solutions. These can take the form of
country visits, teleconferences, intranet utilisation and
best-practice presentations.
Some organisations argue that if the business is
managed at an international regional level (e.g.
Europe), then improvements become visible to all
geographies.
Reporting &
Meetings
Weekly or monthly reporting methods, and monthly
steering committee meetings, are used to share
performance results and best practice solutions.
Multi-Functional
Project Teams
These can be a very effective way of driving cross-
functional understanding and communication, and are
essential for many project design and implementation
initiatives. Collaborative project teams with the retailer
customer can also ensure that strategic goals are
aligned.
Word-of-mouth Word-of-mouth - but with no specific PR exercises.
Although all of these methods will go some way in achieving best-practice transfer, one
of the criticisms against these methods is that the sharing of information, and
subsequent learning, initially only benefits the colleagues who were fortunate enough to
attend the event, meeting or be involved in the project.
A key challenge for any organisation is how to disseminate important best-practice on a
wider scale. Interestingly, the use of newsletters & videos and inter-departmental visits is
relatively low across organisations. It is likely that a good mix of all of these methods will
ensure that organisations are reaching as many colleagues as possible, and are equipping
their people to improve current performance. The role of people in enabling best practice
in the supply chain is discussed in the next section.
Enablers of Supply Chain Best Practice
Note: Companies can choose more than one enabler
0 1 2 3 4 5 6 7 8 9 10
Other
External Business Examples
Technology
Clear Key Performance Indicators
Training
Process
People
Ranking (low to high)
118
IGD 2006
4.7 Enablers of Best Practice in Supply Chain
In contrast to the methods for transferring best practice and performance, IGDs survey
asked companies to rank the enablers of best practice within the organisation in order
of importance, choosing from people through to technology.
4.7.1 People
It is perhaps of no surprise that the role of people in the creation, delivery and transfer of
best practice is key for most organisations. The preferred methods of transfer highlighted
in the previous section support this view, as most are reliant on both colleagues and
industry peers coming together to share information, whether through specific job roles,
events, job transfer or project teams. Most best-practice techniques are people-
orientated.
4.7.2 Process
The importance of clear business processes is also viewed as an important enabler of
best practice, whilst training, clear performance targets and technology all play a
supporting role. In terms of Other enablers of supply chain best practice, open
communication, alignment of supply chain with the strategic direction of the company,
and data visibility with one-touch processing are all mentioned.
119 IGD 2006
4.8 Continuous Improvement & Re-Engineering Approaches
IGD asked companies to comment on their use of more structured, formalised, external
continuous improvement and re-engineering techniques. As many respondents to the
survey were from manufacturing companies, one would expect a number of production
improvement techniques to be used by leading companies.
Use of Continuous Improvement Techniques
Note - companies can choose more than one technique
41%
24%
24%
20%
20%
9%
Business Process Re-engineering
Lean Methodologies
Six Sigma
Total Productive Maintenance (TPM)
Other
As a key element of just-in-time methodology, continuous improvement means making
many small improvements in business methods, processes and products in a never-
ending quest for business excellence, and invariably involves a strong degree of worker
involvement.
4.8.1 Business Process Re-engineering (BPR)
The most common continuous improvement technique cited in IGDs international
supply chain survey was the use of Business Process Re-engineering (BPR) with 41% of
companies saying they used it. This holistic, customer-centric technique involves the
analysis of business processes and the planning and implementation of improved
processes across business functions.
Technology can often play a key part in helping the organisation gather information
about the current business organisation, provide workflow and process analysis tools, as
well as business modelling and simulation techniques.
4.8.2 Total Quality Management (TQM)
Many people in any given organisation will spend much of their time, or indeed all of
their time, looking for errors, rectifying errors, dealing with customer service complaints,
and re-doing things. Errors have a way of multiplying, as they affect different parts of the
supply chain. In response to this reality, Total Quality Management (TQM), which is being
used by 24% of companies surveyed, aims to improve the effectiveness and
competitiveness of a company by looking at the business as a whole.
120
IGD 2006
TQM is a continuous improvement initiative that requires every activity and person of an
organisation to work together to understand how they affect others, and how others
affect them. In addition, TQM is a method of removing waste, by helping different
departments communicate more effectively. It is clearly customer focused and
organisations must ensure that the front-line staff, like telephone operators, security
staff or financial teams, who are often the first point of contact for a customer, are
included in any initiative. Quality cannot remain the sole responsibility of the quality,
production, or operations teams. (Source: Production and Operations Management,
Muhlemann, Oakland & Lockyer, Prentice Hall, 1992.).
4.8.3 Lean Methodologies
Lean Methodologies, also receiving 24% of company votes, is an all encompassing
philosophy based on the Toyota production environment. Also taking a holistic approach
to business improvement, it looks at culture, structure and systems:
Waste elimination
Just-in-Time (JIT)
Supplier integration
Automation
Team working & empowerment
Other approaches to continuous improvement mentioned by surveyed companies
included internal training programmes on continuous improvement and strategy
development. Equally, it was also recognised that sometimes there was no formal process
method used at all:
Whilst supply chain performance majors on operational excellence above all customer
service and minimising product wastage - analytical processes to identify and implement
longer-term improvements are not emphasised as much as they could be. FMCG Supplier
It is true to say that whilst many companies have transformed their entire production
environment to become a 'lean organisation', IGD believes the competitive edge is
now firmly with a "lean supply chain", bringing synergies with external suppliers and
customers, as well as driving continuous internal improvements.
121 IGD 2006
4.9 Best-in-Class Companies
Whilst it is important for organisations to share information and drive best practice
internally, through both formal and informal methods, it is also important for companies
to look externally to other companies, and understand what they do differently that
supports their success and position within the industry.
In this way, IGD asked those companies surveyed to share their thoughts on those
retailers, manufacturers and service providers who could be admired and considered as
best-in-class examples.
It is fair to say that best practice can also be gained from companies who are not trading
in the same sector, particularly in terms of logistics expertise, as the best performing
supply chains are not necessarily those of ones direct competitors.
4.9.1 Which Retailer Do You Most Admire?
Winning Characteristics for the 'Leading' Retailer
1. Growth (Sales & Profitability)
3. Integrated supply chain
4. Distinct business model
5. Strong collaborative relationships
Most Admired Retailer
N.B. - The remaining percentage (30%) was made up of a mix of retailers from Carrefour, Dell, Inditex, Louis
Vuitton, Marks and Spencer, Mercadona, Sainsburys and Waitrose.
39%
21%
5% 5%
0%
10%
20%
30%
40%
Tesco Wal-Mart (inc. Asda) Aldi/Lidl Ikea
Name of Retailer
%

V
o
t
e
122
IGD 2006
The second most-admired retailer in the survey was the international retailing giant that
is Wal*Mart. With 21% of the votes, the global company has critical mass and focuses
heavily on the use of technology and processes to increase the efficiency of its
operations.
Name of Retailer Reason
"Very efficient"
"Learns from mistakes"
"Their collaborative approach - engaging suppliers to want to
succeed together"
"Flexibility of the supply chain, and integration of the supplier in
the supply chain"
"They have incorporated technology as an aide to everyday
business, and they will help (the supplier) to achieve similar goals,
by providing the information you need when you need it."
"Very good model for end-to-end supply chain transparency"
A selection of retailers scored similarly, with 5% of the vote each, including the
discounters Aldi and Lidl who were often listed together and the non-food Swedish
international retailing giant Ikea. There is a focus on brand clarity and supply chain
excellence.
"Focus and will to win"
"Continuing growth"
"Business strategy - always one step ahead of their competitors"
"Focus on the end customer and engineering the business to
deliver most effectively against their needs"
"Single-minded customer focus and continuity of strategy"
"For its application of the lean methodology to distribution"
"Both in service and cost - probably the most logistically
sophisticated retailer in the world"
Tesco by far, with 39% of replies, came out top of the list of most-admired retailers. The
continued sales and profitability growth, focus on the shopper, and clear strategy, is
helping drive the success of the Tesco brand across international markets:
123 IGD 2006
"Clear understanding of their existing customer-base, and have
successfully stretched their brand by innovative assortment,
international expansion, exploiting the weaknesses of their full-
service retail competition, and have good long-term
relationships with suppliers"
"Most efficient, professional business model and cross-border
implementation" (Lidl)
"A distinct and unique brand in an homogenous market,
supported by logistics on a grand and effective scale"
"Complete control of all parts from the trees to the use of pieces
of furniture in the home"
There were a number of other individual retailers covering a selection of grocery, general
merchandise and technology retailers from around the world, including Target,
Mercadona, Inditex and Dell.
This grouping also focused on the higher-end of the market, with retailers such as Marks
& Spencer, Louis Vuitton, Sainsburys and Waitrose. Carrefour was mentioned as having
the closest strategic and operational fit, in terms of market presence and logistics
infrastructure.
"Market commonality and supply chain closeness"
"Completely reinventing the supply chain, enabling individually-
bespoke products to be delivered with an incredibly short lead-
time"
"With its Zara format it has the shortest lead-times in the fashion
industry"
"Profitable, desirable, crystal-clear profile, never on sale"
"For their simplicity"
"For their five mission definition and implementation - customer,
employee, supplier, society and capital"
"Really turning things around, and are a pleasure to work with"
"Very strong business continuity planning"
"Profit without pillage"
124
IGD 2006
Name of Supplier Reason
"Overall business organisation for customer management, and
brand development capabilities"
"Very proactive in many supply chain areas, and clearly value it
highly within the organisation"
"17 different countries/languages on the Swiffer pack!"
"Leading edge and scale in every market with very good
shareholder value"
The predominance of Procter & Gamble in the poll is perhaps not surprising when one
considers the companys impressive international presence and brand awareness, even in
developing markets in China, Russia and South America. That brand development,
combined with supply chain scale in every market, means that P&G are viewed as being
leading-edge and proactive in driving their business.
4.9.2 Which Manufacturer Do You Most Admire?
When choosing a best-in-class manufacturer, the survey showed that success was much
less homogenous than with the retailers, and that with the exception of Procter &
Gamble, with 30% of the vote, few other suppliers attracted several votes.
This apparent lack of recognition for some of the industrys leading manufacturers could
be due to the fact that there are more of them, or compared to relatively few large-scale
international retailers; or a reluctance from the respondents (whom manufacturers form
the majority) to accept that ones competitor could be better than ones own company.
Winning Characteristics for the 'Leading' Manufacturers
1. Innovative
2. Effective brand management
3. Speed-to-market
4. Excellent customer management
5. Scale and agility of supply chain
125 IGD 2006
Name of Supplier Reason
"Not the biggest, not the smallest, but agile"
"Maintaining a very competitive supply chain, while broadening
their range and catering for B2B contract trade, as well as
encompassing B2C direct deliveries"
"The way they manage their international relations with retailers,
and their marketing success"
"Masters at managing differentiation and complexity"
"(I) like the business ethics and marketing"
"Always a first-mover in relation to high ethical standards in toys"
"They have turned their market around and are innovative in
every way from product through to packaging and marketing"
"Flexibility & Marketing expertise"
"Brilliant identification of an NPD opportunity, superb creation of
a brand position suited to the modern trend for extreme sports,
youth excitementenables it to command a brand premium"
"Good international supply chain, and investment in the future
through their Supply Chain Academy"
4.9.3 Which Service Provider Do You Most Admire?
It is fair to say that there were not a large number of nominations in this category, and no
overall preferred provider. One can assume that this may be due to the variety of
providers in the market, and that the companies in this sector do not always have best-
in-class service and cost-base in every market and every supply chain in which they
operate. There are often more local players who are best able to suit the local market
needs, and who have stronger relationships with the local customer base.
Winning Characteristics for the 'Leading' Service Providers
1. Efficient and cost-effective
2. Innovative
3. Great customer service
4. Tailored solutions
5. Sound operational delivery
126
IGD 2006
In terms of logistics providers, the market is still highly fragmented and even the larger
players do not always have full international coverage, so that smaller local firms are able
to be more competitive. Some international retailers and manufacturers will exploit those
differences in service offering by using a variety of logistics firms across different markets.
This strategy aims to gain the best total supply chain performance, whilst ensuring that
the additional complexity created is not to the detriment of the total benefit.
Name of Logistics
Provider
Reason
"True national shared user"
"A professional approach in a broadly unprofessional sector"
"Great start-up of a new DC in France"
"A very efficient and cost-effective transport network for Central
Europe"
"Offering multi-modal distribution and although relatively new
to contract haulage have quickly established themselves as
category leaders"
127 IGD 2006
In this way, in terms of highlighting current solutions to help improve the working
environment for companies trading internationally, IGDs survey asked respondents for
details of their current supply chain initiatives.
Focus of Top Supply Chain Initiatives
1. Demand planning and forecasting
2. Cost management
3. Inventory management
4. Customer Service
5. Production, warehousing and distribution
6. Availability
7. Retail Ready Packaging
8. Data issues and Technology
Opportunities for Supply Chain Improvements
Operational initiatives within and between organisations
Strategic opportunities in trading markets
Changes to the current legislative environment
Infrastructural investment
Closer working relationships between supply chain partners
4.10.1 Demand Planning and Forecasting
Improvements in demand forecasting and planning are by far at the top of the supply
chain agendas for most of the companies surveyed. This result leads IGD to believe that
there are significant opportunities for supply chain efficiencies in this area.
Many companies are looking at ways to improve current practices - improving the
resource and commitment to demand planning, improving the S&OP process,
Seasonal forecasting.
Increasing the degree of collaboration with retail customers through collaborative
planning, forecasting and replenishment (CPFR) and even vendor-managed inventory
initiatives (VMI) - pallet size and order size optimisation, forecast collaboration.
Simple internal business alignment projects - improvement in customer service by
the Sales team owning the sales forecast and up-dating it on a real-time basis.
A greater role for technology solutions providers - More effective demand
management, including the integration of new software.
4.10 Top Supply Chain Projects
Although the supply chain issues cited throughout this report are varied in their nature,
IGDs research also indicates many opportunities for improvement in managing
128
IGD 2006
4.10.2 Cost Management
Cost initiatives are the second most-cited supply chain focus for those companies who
participated in IGDs survey. With constant competitive pressures, demands for lower
prices, difficult trading conditions in some markets, and increasing external business
costs (e.g. fuel costs, legislative framework), companies are having to continuously re-
evaluate their cost base, and ensure that their supply chain is as lean as possible. Some of
the techniques listed by companies include:
Cost to serve to determine true customer profitability
Activity Based Costing cost allocation for different product groups
Continuous tendering for cost reductions
Further supply chain integration to maximise efficiencies and cost reduction
Waste reduction
4.10.3 Inventory Management
Although considered part of a cost management process, stock management in its own
right has also been cited as a key area of focus for the international supply chain. This
could be in terms of stock reduction initiatives and lean deployment, a reduction in the
amount of work-in-progress (WIP) through better production processes, or improving
the way that inventory is managed via an information system. Supply chain optimisation
is the aim of the stock management process, so that inventory can be as low as possible,
but high customer service levels are maintained.
4.10.4 Customer Service
It is fair to say that excellent customer service is fundamental to any successful trading
relationship. Whether through creating multi-functional customer teams, aligning global
customers into global account management initiatives, or making operational
improvements to ensure a faster time-to-market, outstanding customer service is
paramount, and yet continues to challenge even the most sophisticated of international
companies.
4.10.5 Production, Warehousing and Distribution
Operational supply chain improvements also feature within the survey of top supply
chain initiatives. While some companies mention a move to global manufacturing
capability, others are looking at ways to consolidate the physical network by reducing the
number of distribution centres or tendering existing contracts.
Transport projects are a key focus for many companies, and include sourcing a single
supplier for transport, general cost management, as well as the need to improve the
effectiveness of existing contracts, particularly in the area of export administration. An
increase in factory-gate collections, twilight deliveries and drop & go initiatives for
retailers are also mentioned.
129 IGD 2006
4.10.6 Availability and Retail Ready Packaging
These two areas have been cited by a large number of survey respondents as key areas
of focus for the international supply chain teams. IGD believes these topics will continue
to dominate discussions in the food and grocery supply chain for the foreseeable future,
as companies improve their supply chain visibility and retailers in particular drive forward
their in-store replenishment improvement initiatives.
In an aim to improve on-shelf availability, many projects will include moves to increase
the use of different forms of retail ready packaging. Guidelines and standards in this area
will go some way to increasing the speed of adoption, as well as wider adoption by
international retailers across many markets.
4.10.7 Data Issues and IT Improvements
Technology within the international supply chain focuses on a variety of topics, from the
adoption of RFID, through to the implementation of new ERP systems, data alignment
projects with retailers, and the improvement in management information, particularly for
production planning and forecasting.
Investments in new IT tools can be a key part of any supply chain efficiency programme,
whether by improving operational effectiveness, or increasing visibility of the chain for
improved customer service. For global manufacturers, data alignment can be considered
as the foundation, or building block, for many other supply chain initiatives, as good basic
data will help ensure that other processes work more efficiently.
130
IGD 2006
4.11 In Summary
Getting the right stock to the right place, at the right time, and in the right quantity may
be an old adage, but it continues to be the basis for all good supply chain practices, and
also continues to challenge many companies in the industry, both large and small,
retailers and suppliers alike. With the ultimate goal being shopper satisfaction, further
collaboration in the industry through better management of the international supply
chain will be a powerful tool in delivering higher sales, lower costs, and excellent
customer service.
Where organisations still have a compartmentalised view of the supply chain, there are
still many challenges in driving strategic alignment and real end-to-end capabilities.
Collaboration can be limited, and the primary focus of the external trading relationship is
simply to get the product to the retail customer. Once in the retailer's possession, what
then happens to the product remains, for some at least, the domain of the retailer.
Although some companies are generally taking more of a holistic view to supply chain
management, both internally and externally to the organisation, and they understand
the key role that the manufacturer can play in ensuring their product reaches the
shopper, it is true to say that this is not the case for all.
Although 'best-in-class' can represent something slightly different for a retailer
(collaborative), a supplier (brand management) or a service provider (cost effective), there
are also some distinct similarities across the end-to-end supply chain for a winning
business formula. The companies that came out on top of the IGD international supply
chain poll all show elements of the following key characteristics in their business models:
Winning Characteristics
2. Operational delivery
3. Innovation
Overall, IGD's Managing International Supply Chains report has identified few differences
between retailers and manufacturers in terms of their key supply chain projects, which
certainly suggests a degree of supply chain alignment. Whilst improved availability is 'top
of mind', so is reducing stock levels, delivering less stock more frequently, and shortening
the time to market.
Highlighted through the vast array of case-studies and examples in this report, the
challenges for managing international supply chains can be significant, and indeed the
solutions many, but IGD believes that closer industry collaboration will help companies
overcome many of the barriers to delivering world-class international supply chains.

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