Strategic design + Development

Review of domestic and international pallet standards and ongoing operational and cost implications to Australian Domestic and International Logistics Final Report
21 March 2002

Creating new horizons for your value chain

Suite 105, 51 Rawson St, Epping, Australia P.O. Box 1075 Epping NSW 1710 Telephone +61 (0)2 9868 2590 Facsimile +61 (0)2 9868 3517 ABN 42 362 863 808

Strategic design + Development

Domestic and International pallet standards Operational and cost implications

TABLE OF CONTENTS 1. 2. 3. 4. 5. INTRODUCTION ........................................................................................................................................................................................................................................6 1.1 Some History .....................................................................................................................................................................................................................................7 CONCLUSIONS...........................................................................................................................................................................................................................................8 RECOMMENDATIONS ...........................................................................................................................................................................................................................10 EXECUTIVE SUMMARY ........................................................................................................................................................................................................................11 SYNOPSIS OF PREVIOUS WORK ........................................................................................................................................................................................................16 5.1 GISCC - The Australian Pallet Study ..............................................................................................................................................................................................16 5.2 Efficient Unit Load study by A.T. Kearney.....................................................................................................................................................................................17 5.3 Efficient Consumer Response (ECR) : a survey of the Australian grocery industry .......................................................................................................................18 5.4 ECR Pallet Implementation Project: Apaper provided ECR Asia (Singapore)................................................................................................................................19 5.5 Conclusions......................................................................................................................................................................................................................................19 CONCEPTUAL FRAMEWORK .............................................................................................................................................................................................................20 6.1 Preamble ..........................................................................................................................................................................................................................................20 6.2 Supply Chain Typology ...................................................................................................................................................................................................................22 6.3 Changes in market mix ....................................................................................................................................................................................................................24 6.4 Study components............................................................................................................................................................................................................................25 6.5 Conclusions......................................................................................................................................................................................................................................26 SYNOPSIS OF SURVEY OUTCOMES ..................................................................................................................................................................................................28 7.1 Respondents.....................................................................................................................................................................................................................................28 7.2 Summary of Interviews....................................................................................................................................................................................................................29 7.3 Conclusions......................................................................................................................................................................................................................................29 MARKET CONTEXT ...............................................................................................................................................................................................................................30 8.1 Market Framework ..........................................................................................................................................................................................................................31 8.2 Manufactured Goods........................................................................................................................................................................................................................31 8.3 Agricultural Goods ..........................................................................................................................................................................................................................33 8.4 Retail Markets..................................................................................................................................................................................................................................34 8.5 Export and import trade ...................................................................................................................................................................................................................35 8.6 Value of Market Segments...............................................................................................................................................................................................................39 8.7 Conclusions......................................................................................................................................................................................................................................41 AUSTRALIA’S LOGISTICS TASK ........................................................................................................................................................................................................42 9.1 The task in 2001...............................................................................................................................................................................................................................42 9.2 Domestic pallet statistics..................................................................................................................................................................................................................47

6.

7.

8.

9.

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9.3 9.4 9.5 9.6 9.7 9.8 10.

Growth forecasts ..............................................................................................................................................................................................................................48 Transport indicators .........................................................................................................................................................................................................................48 The market mix of the logistics task ................................................................................................................................................................................................49 The task in 2020...............................................................................................................................................................................................................................50 Implication of the future task...........................................................................................................................................................................................................52 Conclusions......................................................................................................................................................................................................................................53

PALLET USAGE AND INTERNATIONAL TRADE............................................................................................................................................................................55 10.1 Import-oriented containers...............................................................................................................................................................................................................56 10.2 Export-oriented containers...............................................................................................................................................................................................................56 10.3 Conclusions......................................................................................................................................................................................................................................57 OPERATIONAL IMPLICATIONS .........................................................................................................................................................................................................58 11.1 Arguments to retain 11652 pallet .....................................................................................................................................................................................................58 11.2 Argument to adopt ISO pallet ..........................................................................................................................................................................................................59 11.3 Storage issues...................................................................................................................................................................................................................................59 11.4 Pallet and order make-up .................................................................................................................................................................................................................60 11.5 Vehicle interface ..............................................................................................................................................................................................................................61 11.6 Container loading.............................................................................................................................................................................................................................63 11.7 Conclusions......................................................................................................................................................................................................................................65 FINANCIAL ANALYSIS ..........................................................................................................................................................................................................................66 12.1 Framework.......................................................................................................................................................................................................................................66 12.2 Cost Elements ..................................................................................................................................................................................................................................66 12.3 Discounted cash flow and NPV assessments ...................................................................................................................................................................................68 12.4 Conclusions......................................................................................................................................................................................................................................69 APPENDICES ............................................................................................................................................................................................................................................70 PUBLICATIONS AND RELATED ARTICLES ....................................................................................................................................................................................76 14.1 ECR Standard Pallet Implementation Project ..................................................................................................................................................................................77 14.2 Efficient Unit Loads by A.T. Kearney .............................................................................................................................................................................................85 14.3 Efficient consumer response (ECR): a survey of the Australian grocery industry ..........................................................................................................................88

11.

12.

13. 14.

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Domestic and International pallet standards Operational and cost implications

SUMMARY OF FIGURES Figure 5-1 Composition of capital cost elements identified within the GISCC report ...........................................................................................................................................17 Figure 6-1 Conceptual framework linking the purpose of the pallet to the prevailing market demands and product attributes.............................................................................20 Figure 6-2 A Supply Chain Typology outlining influences on Australia's logistics processes...............................................................................................................................22 Figure 6-3 Transport and storage output and gross domestic product index ...........................................................................................................................................................24 Figure 6-4 Key components of logic within the study............................................................................................................................................................................................25 Figure 8-1 Market structure delineating key segments within supply and demand cycles ......................................................................................................................................31 Figure 8-2 Subdivision (by value) of Australian manufacturing (including imports and exports) by unitisation class...........................................................................................32 Figure 8-3 Subdivision of Retail market within Australia ......................................................................................................................................................................................34 Figure 8-4 Value of the major Market Segments for unitised goods within the Australian market .......................................................................................................................39 Figure 9-1 Apportionment of container flows as full and empty imports and exports in 2000 ..............................................................................................................................44 Figure 9-2 5 Ports volume of container flows in 2000 ...........................................................................................................................................................................................44 Figure 9-3 Supply chain configuration incorporating road, rail and sea freight movements on unitised non-bulk products .................................................................................46 Figure 9-4 Transport and Storage output and Gross Domestic Product .................................................................................................................................................................48 Figure 9-5 Trend analysis for container throughput for the five major ports..........................................................................................................................................................48 Figure 9-6 Consumer (Grocery and food) - Market value estimates based on growth forecasts ............................................................................................................................51 Figure 9-7 Consumer (Non-Grocery and household) - Market value estimates based on growth forecasts...........................................................................................................51 Figure 9-8 Industrial/Other - Market value estimates based on growth forecasts...................................................................................................................................................51 Figure 9-9 Totals (All market segments) - Market value estimates based on growth forecasts..............................................................................................................................51 Figure 9-10 Forecast trade and consumption comparisons by market sector and total...........................................................................................................................................52 Figure 11-1 Various combinations for trailer length and pallet size........................................................................................................................................................................61 Figure 11-2 Trailer utilisation, showing under-utilised capacity .............................................................................................................................................................................63 Figure 11-3 Demonstrates the difference in loading/unloading techniques.............................................................................................................................................................64

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Domestic and International pallet standards Operational and cost implications

SUMMARY OF TABLES Table 4-1 Growth rates and value by market segment forecast for 2010 and 2020................................................................................................................................................14 Table 4-2 Container movements by pallet standard.................................................................................................................................................................................................14 Table 4-3 Matrix for operational decision criteria ..................................................................................................................................................................................................15 Table 6-1 Assessment of growth scenarios based on alternative task apportionment and predicted growth forecasts...........................................................................................24 Table 7-1 Summary of key survey participants ......................................................................................................................................................................................................28 Table 8-1 Australian Market for Manufactured Goods ..........................................................................................................................................................................................31 Table 8-2 Summary of Agricultural production and export activity.......................................................................................................................................................................34 Table 8-3 Subdivision of the Retail market within Australia .................................................................................................................................................................................34 Table 8-4 Summary for import trade, segmented into the unitised classification...................................................................................................................................................37 Table 8-5 Summary for export trade, segmented into the unitised classification ....................................................................................................................................................38 Table 9-1 Logistics volumes for relevant market segments (unitised/containerised) .............................................................................................................................................42 Table 9-2 Inter-capital road freight matrix 1998-99 ('000 tonnes) .........................................................................................................................................................................43 Table 9-3 Use of domestic and ISO containers within long distant freight movements.........................................................................................................................................43 Table 9-4 Summary of container activity for 1998-9 .............................................................................................................................................................................................44 Table 9-5 Summary of Coastal Shipping of Containerised freight.........................................................................................................................................................................45 Table 9-6 Estimated volume for pallet issues per annum .......................................................................................................................................................................................47 Table 9-7 Summary of key market indicators.........................................................................................................................................................................................................48 Table 9-8 Summary of the current and modelled growth by market sector............................................................................................................................................................50 Table 9-9 Growth rates and value by market segment forecast for 2010 and 2020................................................................................................................................................53 Table 10-1 Geographic distribution of pallet standards..........................................................................................................................................................................................55 Table 10-2 Import containers by market segment and pack type ...........................................................................................................................................................................56 Table 10-3 Import containers by pack type and pallet standard at origin ...............................................................................................................................................................56 Table 10-4 Export containers by market segment and pack type ...........................................................................................................................................................................56 Table 10-5 Export containers by pack type and pallet standard at destination .......................................................................................................................................................56 Table 10-6 Container movements by pallet standard..............................................................................................................................................................................................57 Table 11-1 Matrix for operational decision criteria ................................................................................................................................................................................................65 Table 12-1 Summary of cost elements within financial summary..........................................................................................................................................................................67 Table 12-2 Project inventory and other costs and benefits .....................................................................................................................................................................................68 Table 13-1 Scenarios "A" - "C" indicating growth in indices in the intervening years ..........................................................................................................................................70 Table 13-2 Value of market segments and determination of task size by segment ................................................................................................................................................71 Table 13-3 Forward projections of production, export, import and consumption estimates based on derived growth indices, by market sector..................................................73 Table 13-4 Summary of Import Containers by Origin port for 1995 and 2000 ......................................................................................................................................................74 Table 13-5 Summary of Export Containers by Destination port for 1995 and 2000 ..............................................................................................................................................75

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Domestic and International pallet standards Operational and cost implications variations in standards and systems generate direct and indirect non conformance costs. Taking a 20 year view, and understanding that import and export trade have substantially higher growth rates than domestic production and consumption, the “markets” served by Australia’s domestic and international fields, will fundamentally change. International trade as a percentage of domestic consumption will increase Multi-national firms are consolidating their manufacturing platforms and economising on product range The Asia region is emerging as a substantial market with countervailing power to set standards This study incorporates a market perspective and models forecasts the changing market mix. Over 40 organisations were interviewed to determine their direction in manufacturing and marketing strategy and to relate these issues to pallet standards. The pallet remains one of the most pervasive items of logistics equipment, yet this issue is largely dismissed as trivial by many logistics practitioners within Australia. However there is a strong correlation between the views of the multinational organisations for the need to align Australia’s pallet and container standards with those of its dominant trading partners. Multi-nationals will make decisions as to where they base their production platforms and/or source materials and products based on the overall cost of supply.

1.

INTRODUCTION

This study into the operational and cost implications of the Australian Pallet in Domestic and International Logistics has been commissioned by the Integrated Logistics Network (ILN) Australian Marine Group (AMG) Debate regarding the suitability and implications arising from the Australian pallet standard has been ongoing since the mid 1990’s. Despite several recent studies and the dual recognition of both the Australian and ISO pallet criteria the Australian Standards regime (AS4762-2000 “General-purpose flat pallets), the issue remained unresolved in a number of forums. Globally, there are four (4) dominant pallet sizes utilised. These are: 1200 x 1000mm pallet, cited as the ISO standard and most common across Asia, Americas, Europe and New Zealand 1200 x 800mm pallet, known as the Euro-pallet 1100 x 1100mm pallet used in Japan and Korea 1165 x 1165mm pallet used exclusively in Australia Contemporary argument seeking to retain the 1165 pallet have been based on the cost to alter the pallet pool (around 15 million pallets), adjust racking and associated equipment, and increased warehousing costs. Conversely, previous studies have failed to identify and assess the implications of an increasingly global logistics network, where
2

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Domestic and International pallet standards Operational and cost implications Soon after, the Australian Government took over the responsibility for the pool of pallets under the Commonwealth Handling Equipment Pool, more commonly known as CHEP. In 1958, CHEP was sold to Brambles and the pool had grown to around 90,000 pallets, yet usage was still limited to the waterfront. By the late 1960’s the pool of pallets had grown to around 600,000 pallets based on the original standards. Today the number of pallets is around 15 million with Brambles, TNT and Loscam offering products based on the 1165*1165 mm footprint. Given the relative isolated nature of Australia’s land transport system, the 11652 pallet has provided an effective means of moving goods. Freight forwarders and transport operators have invested in equipment based on the 11652 pallet. Similarly racking and conveyor systems have been developed that accommodate the pallet standard.

Australia’s inability to adopt standards which are aligned with its trading partners will substantially disadvantage its Effectiveness to attract investment Ability to supply export products to current and new markets Ability to import value added products in a cost effective manner Recently a FMCG multinational manufacturer made a decision to relocate a major production facility to SE Asia and to consolidate production. In this instance, Australia will become a net importer of the finished product rather than being a net exporter. Those products will be distributed from SE Asia in cartons that conform to ISO standards and configured to fit ISO pallets. Considering the supply chain cost implications of this and other examples, Australia will be best served by commencing a process to align its pallet and carton standards towards the ISO standards used by its trading partners. To not undertake this process is like the decision by the USA to maintain the imperial standard of measurement, as the rest of the globe embraced metric measurements. One interviewee surveyed the issue akin to dental surgery, saying “it will hurt to get the tooth out, but it will only get worse if we don’t”.

1.1

Some History

At the end of the Second World War, the US forces abandoned around 60,000 pallets which had been used for materials handling purposes. These measured 46 inches by 46 inches and fitted the vehicle tray standards at the time.

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Domestic and International pallet standards Operational and cost implications (ii) Previous assessments to migrate to the ISO standard have been influenced by short-term assessments and a disproportionate level of control by a few firms within the supply chains. Recognising the differential growth rates, it is highly feasible that the sum of international export and import trade movements will reach 70% of domestic trade (and consumption) by 2020.

2.

CONCLUSIONS

1. Australia is part of a global economic and logistics system. If ignored the corollary is that Australia will be relegated as player within the development of supply strategies and processes servicing the burgeoning Asian market. 2. Global manufacturing and brand managers are seeking scales of economy and standardisation of inventory, supported by least cost supply channels, necessitating an alignment of pallet standards and efficient unit load strategies between Australia and its trading partners. 3. Decisions regarding investment and establishment of manufacturing platforms within Asia1 will depend on the potential and capacity for host countries to provide and integrate the requisite and supporting capabilities and standards. Australia must address its lack of readiness in this regard. 4. Efficient Consumer Response (ECR) strategies have emerged as a critical enabler of supply chain efficiency within grocery supply and demand channels at a global level. Such strategies explicitly reinforce the need for efficient unit load (EUL) concepts and harmonisation of standards at a global and regional level, rather than historic and expedient activities at the domestic level. (i) 65% of Australia’s trading partners (by volume) utilise the ISO pallet footprint as a key driver for dimensioning logistics standards.
1

(iii)

5. Whilst transitional processes may require more than 5 years, a strong economic case exists for Australia migrate towards the ISO standard for pallets, linked to a similar adoption of cartons sizing standards. The issue must be seen in the context of value foregone in the medium to long term, rather than the cost of transition in the near future. 6. Australia operates two container pools each servicing discrete segments of the market (namely international trade and domestic trade) arising as a consequence of the Australian pallet size. (i) Substantial inefficiency exists at the container loading and unloading interface, requiring the need to universally develop and implement unitised loading based on the optimal pallet footprint, however without the need to use a pallet in the process. This represents an integral element of the EUL concept applied to the international freight task. (ii) Freight imbalances cause the movement of empty ISO containers in parallel with loaded domestic containers, and the return of the empty domestic container, yielding a cost of $20 million marginal cost and $40 million opportunity cost. These costs would be expected to triple over time concurrent with the growth in international and domestic trade.

Asia incorporates ASEAN, Middle East, North Asia, South Asia

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7. Implementing the ISO standard requires conformance costs of $600 million over ten years however the NPV benefits are over $2.5 billion exist for the period to 2020 (assuming 30% pre tax discount rate). (i) The primary benefits are the ECR and EUL strategies and the secondary benefits are efficient container loading utilising unitised handling processes. (ii) The NPV benefits increase to $5.1 billion if the pre-tax discount rate is decreased to 20%. 8. Many industry representatives understand the strategic benefit of standardising on pallet size, however express the need to address the transitional arrangements (i) Past assessment and treatments of the transitional costs have inhibited commencement and/or progress towards the new ISO standards (ii) A review of depreciation and write-off arrangements is necessary (iii) Strategies such as double depreciation on investment in compliant equipment should be considered. 9. A clear need exists for government to facilitate the process. Comparisons can be made with the adoption of metric standards, taxation reform, the introduction of new currency, trade reform and assistance, and the like.

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3.

RECOMMENDATIONS
(ii) (iii) as a demonstration of Australia’s long term commitment toward the Asia markets in support of market development programs such as Supermarkets to Asia

1. This study recommends the progressive adoption of the ISO pallet standard for Australia with full implementation by 2010. 2. It is recommended that government provides leadership in the implementation of the ISO standard and recognises that (i) there is a predisposition towards the status quo by industry based on short-term planning horizons, and (ii) the misalignment of standards should be seen in the context of a “market failure” that government has a legitimate right to address. 3. It is recommended that the outcomes of the study be presented to Australian Transport Council (ATC) via the Integrated Logistics Network, with the view of achieving support towards the ISO standard by ATC. 4. It is recommended that the ILN design and promote an implementation strategy through the Transport and Logistics Working Group for industry awareness, consultation and delivery of the new ISO standard. 5. It is recommended that a review be undertaken of the process and adequacy of implementing Efficient Consumer Response and Efficient Unit load strategies by Australia (i) as part of Australia’s contribution towards the implementation of efficiency within international supply chains

6. It is recommended that depreciation and write-off costs relating to compliant transitional and/or capital expenditures be structured within a range of taxation incentives designed to foster timely implementation of the standard. This recognises that (i) strategic and operational factors identified within the study yield a positive economic and financial outcome concurrent with the adoption of the ISO standard, particularly within an ECR/EUL context (ii) supply chain standards have long term implications for trade, and government must remove short-term impediments for industry recognise the transitional cost burdens acknowledge the extent of sunk cost treatments for distribution infrastructure

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Domestic and International pallet standards Operational and cost implications increased warehouse expansion costs, a finding which is not generally accepted from the survey conducted within this study. An ECR study conducted in 1999 outlined the strategic relevance of ECR within the Australian Grocery industry, and questioned the motives being pursued and the inherent imbalance of power therein. It found that evident deficiencies may cause the strategic benefits to be lost. A copy of the paper is provided in section 14.3 and is titled “Efficient consumer response (ECR): a survey of the Australian grocery industry”. From Section 6 (Framework) The logic and rationale for a prevailing pallet standard is derived from the conceptual notion of a supply chain and its composite elements, which exist within the notion of “why do goods move?” A study into pallets standards requires a number of considerations such as o A long range view of the served market o A holistic view of the supply chain o The relevance of unitisation and efficiency o The relationship between products (SKU’s), pallets, containers and/or trucks Differential growth rates exist for domestic production, export trade, import trade and domestic consumption, which will lead to a change in the market mix served by Australia’s logistics systems (and standards)

4.

EXECUTIVE SUMMARY

The following points are drawn from the summary of each chapter of this report and can be read in context with the Conclusions in section From Section 5 (Previous work) The pallet standards issue has been an integral part of the global debate of the benefits of ECR (Efficient Consumer Response) and EUL (Efficient Unit Loads) strategy. Global consulting firm AT Kearney undertook a seminal study in 1997 and identified that substantial benefits can be realised by harmonising the carton size to the pallet standards, and by developing processes that maintain load (and unit) integrity as far along the supply chain as possible. Such benefits are between 1.21.6% of sales values. A summary of the AT Kearney findings is provided in the appendix in 14.2 titled “Efficient Unit Loads by A.T. Kearney”. ECR Asia has undertaken extensive research and development on this issue, identifying substantial financial benefits and recommending implementation of the 1200 * 1000 mm pallet. This outcome will have significant implications for Australia’s future import and export trade and supporting logistics systems. A summary of the ECR findings is provided in the appendix in section 14.1 titled “ECR Standard Pallet Implementation Project”. The Symonds Henderson report (commissioned by the Grocery industry) recommended the retention of the Australian pallet standard however based 80% of the financial justification on

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Domestic and International pallet standards Operational and cost implications The need for single organisations to tolerate multiple pallet standards within a regional (sub-global) manufacturing or supply strategy. Changes in the market mix serviced by supply chain processes. From Section 7 (Survey) A number of consistent messages emerged from the interview process conducted within the scope of the study Supply chain philosophy in 2001 has progressed significantly since the GISCC report of 1997. Supply chain management has emerged as a critical differentiation for firms in 2001 to 2010 Manufacturing is consolidating to pursue scales of economy Supply chain processes are fundamentally changing with concepts of “shelf ready packaging” and “reverse crate flows”, emerging. This is being facilitated by strategies such as Efficient Consumer Responses and Efficient Unit Load, and supported by great collaboration than has existed in the past. Stockholders are seeing more sophisticated products (crates, trolleys, slip sheeting) and alternate materials such as plastic The future of the wooden pallet is limited; the study and review process was seen to be more about the standardisation process of how individual cartons aggregate into “blocks” or “units” that comply with a universal footprint standard for international distribution. There is a clear awareness by multi-nationals that the carton and pallet size is standardizing on the ISO footprint of 1200 x 1000mm

It is very conceivable that within the next 20 years Australia’s international trade and logistics task will reach 70% of its domestic consumption2. That is
$import + $export % international trade = ---------------------------$ domestic consumption
where domestic consumption is a “proxy” for domestic land transport

Logistics processes and standards are increasingly global in context and application, with marketing and manufacturing strategies being executed at a global/regional level by large multinationals with substantial countervailing power It does not automatically follow that harmonisation between Australia and its customers/suppliers on pallet standards leads to such efficiency if considered in isolation. Nor do such alignments justify an increase of pallet usage within containers to facilitate efficient loading and unloading. The issue is the degree to which retention or dissolution of the current standard impact higher order issues such as Carton sizing, consistent with the global ECR (Efficient Consumer Response) strategy Customer expectation relating to product presentation in overseas markets

2

The GISCC report by Symonds Henderson identified that there is financial justification to introduce the ISO pallet where international trade reached 70% of domestic grocery consumption

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Domestic and International pallet standards Operational and cost implications integrated with international supply and demand markets and delivery channels Products manufactured in Australia for export markets will need to meet customer expectations for packaging storage and transportability. Secondly these products must not also conform to customer systems, without transferring non-conformance costs along the chain. To fail to appreciate this dynamic will cause o Customers to source products from alternate sources o Manufacturers to nominate alternate economies for their production platforms Global manufacturing and brand managers are consolidating with a focus on Asia. Where Australia’s standards and systems do not comply with the systems developed by these firms, the total landed and distributed cost of goods will increase for Australia’s consumers Trade in products which are unitised / containerised will substantial increase as a percentage of domestic consumption.

From Section 8 (Markets) Pallets are not used in all supply chains. Generically, three types of supply chains exist for the purpose of categorisation herein, which are: o Bulk shipments o Semi bulk shipments, typically in containers or as “break bulk” consignments o Containerised movements of unitised freight (pallets, cartons, bags, etc.) o It is the third group relevant to the study Markets considered by this study are manufactured and primary products, retail markets, and export/import international trade Australia’s international trade is around $210 billion, however trade in unitised product represents around 35%, with the majority of the balance relating to shipment of bulk commodities (coal, grain, minerals, natural gas, etc.) The market value of Australia’s*/packaged products is around $150 billion, comprising domestic production retained and imported product, for domestic consumption. This can be subdivided into consumer grocery ($54 billion), consumer non grocery/household ($47 billion) and industrial ($53 billion). Each sub-element has differential growth rates and trade imbalances, further influencing the composition of the market mix. The growth rate for international trade is between 8-10% (compound), whereas domestic production and consumption is around 3-4%. From Section 9 (Logistics) Whilst substantial reform has focussed on domestic transport within Australia across road, rail and coastal shipping segments, it will become more critical that Australia’s transport systems are

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Domestic and International pallet standards Operational and cost implications million per annum and also represents an opportunity cost of $40 million recognising that parallel freight movements by rail and road are undertaken. It is considered that harmonisation between ISO containers and the product footprint (pallet) would address this cost, whether considered in a marginal or opportunity cost treatment. Australia’s pallet pool system is valued at $200 million per annum, and generates around 40 million pallet issues. There are around 15 million pallets in circulation From Section 10 (Pallet usage) Trade to/from containers that use ISO pallets account for 60-70% by volume, with imports growing at 5% and exports at 10% The following table summarises the key results.
Table 4-2 Container movements by pallet standard Pallet size 1100 x 1100 1200 x 1000 1200 x 800 Non Standard TOTAL ‘000 TEU’s % total % growth ‘000 TEU’s % total % growth ‘000 TEU’s % total % growth ‘000 TEU’s % total % growth ‘000 TEU’s Imports 35 10 9 230 62 5 90 24 10 15 4 6 370 Exports 62 16 3 275 69 10 40 10 18 23 5 10 400

Table 4-1 Growth rates and value by market segment forecast for 2010 and 2020
Product, consum ption and trade values for containerised products Comsumer (Food/grocery) Dom. Production Export Import Dom. Consumption Dom. Production Export Import Dom. Consumption Dom. Production Export Import Dom. Consumption Dom. Production Export Import Dom. Consumption Current Growth (a) 11.6% 9.2% 2.6% Modelled Growth (b) 4.2% 10.0% 9.0% 2.6% 4.3% 9.0% 7.0% 4.6% 0.9% 4.0% 5.0% 3.3% 3.7% 8.2% 5.9% 3.5% 2001 $B 61 10 3 54 39 4 12 47 29 8 32 53 129 22 47 154 2010 $B 85 24 7 68 56 8 22 70 33 11 50 71 175 44 79 209 2020 $B 134 63 16 88 86 19 43 110 34 17 81 98 255 99 141 297

Consumer (Household)

13.5% 14.2% 4.6%

Industrial/Other

5.5% 8.4% 3.3%

Total

Ratio international trade to consumption Comsumer (Food/grocery) Consumer (Household) Industrial/Other Total

25% 33% 75% 45%

46% 43% 86% 58%

90% 57% 99% 81%

(a) Based on ABS Economic indicators against market values (b) Composite forecasts derived from ABS Economic indictaors and adjusted to reflect volume growth in contaier 1995-2000

Container movements and volumes relevant to the pallet standards issue are o Imports – 375,000 TEU’s o Exports – 400,000 TEU’s o Coastal shipping Tasmania - 190,000 TEU’s Other - 35,000 TEU’s The movement of empty ISO containers to WA and empty domestic containers from WA yields a marginal cost around $20

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Domestic and International pallet standards Operational and cost implications From Section 12 (Financial) The financial analysis allows for A capital expenditure of $600 million for adjustments to the pallet pool, racking and ancillary equipment over the 10 years The incremental increase in operating costs by $100 million is assumed over the same period The benefits of ECR/EUL are applied to 75% of the market segment for consumer grocery and non grocery products and 50% for industrial products Unitised loading of containers is a substantial benefit The analysis yields a positive NPV of $2.5 billion, assuming an inflation rate of 3% and a discount rate of 30% (pre-tax). This NPV increases to over $5.1 billion of the discount rate is decreased to 20%. Prime-facie, there appears to be a substantial cost impact if the current standard is maintained, leading to non conformance costs arising from the “disconnect” between standards.

From Section 11 (Operations Implications) The decision and supporting logic can be summarised in the following matrix.
Table 4-3 Matrix for operational decision criteria 1165 * 1165 mm pallet Current situation identified as yielding 10% inefficiency in utilisation. EUL analysis identifies 1.2-1.6% cost to sales of such inefficiencies Recommended in GISCC report to be of significant benefit, if harmonised however ignores global trend towards ISO carton standards Increasing trend in this direction will proliferate current inefficiencies further 1200 * 1000 pallet Given certain % of case sizes are based on the ISO standard, this option may absorb under-utilised capacity (and “slack”) Not considered as a viable option

Current carton sizes

Cartons based on 580 * 387 module

Cartons based on 600 * 400 module

Potential to off set near term adjustment costs for infrastructure 60-70% global activity based on ISO standard for cartons and pallets

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Domestic and International pallet standards Operational and cost implications costs of $A62.8 million per annum”. This is based on avoiding any overhang on the pallet. If an overhang is tolerated, the capital cost is reduced to $A980 million. Saving would be limited to $25.3 million for container loading and unloading efficiencies NPV was calculated to be negative $376 million “Only when palletised international trade grows to over 70 percent of the total Australian domestic and foreign grocery and produce sales or there is a significant change to pallet technology, unavailable on the 1165 square, would the NPV become positive” The research identified the potential for significant savings applicable under Efficient Unit Loads (EUL) initiative proposed by ECR Europe and A.T. Kearney GISCC recommended not changing the Australian pallet standard, but did recommend the further development for “optimising the pallet fit” and investigating the EUL methods. Whilst the NPV was negative, it was acknowledged that the EUL benefits would offset the capital and recurring costs, however implied that these benefits should be internalised for the grocery industry Recognition of the ISO pallet subject to the development of future pallet technology or a potential change in the task mix within a higher proportion of international trade evident. Asserted that “in no circumstances should the industry use both sizes in one open system” The composition of the requisite capital costs is shown on the following graph.

5.

SYNOPSIS OF PREVIOUS WORK

A review of the previous work in this area has identified the following references relevant to this study. These are referred to within this report. The Grocery Industry Supply Chain Committee (The Australian Pallet Study) undertaken by Symonds Henderson for the Grocery Manufacturers Association and the Australian Supermarkets Institute (1997) Efficient Unit Loads study by A.T. Kearney (1997) Efficient Consumer Response: a survey of the Australian grocery industry – Harris, Swatman and Kurnia (1999) Recommended Pallet Standard for Asia, a brochure issued by ECR Asia recommending the adoption of the 1200 mm * 1000 mm ISO pallet

5.1

GISCC - The Australian Pallet Study

This report provides a comprehensive overview of the critical elements impacted by a change in the pallet standard within Australia from the perspective of the grocery industry, and presents a number of case studies for manufacturers and distributors. The following conclusions are summarised from the study. “The cost of pallet size conversion would be borne by the domestic grocery manufacturers, retailers and service providers with virtually the only saving benefits being derived from international trade” “The estimated capital cost of a pallet change to the grocery industry is $A1195 million, with perpetual additional operating

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Domestic and International pallet standards Operational and cost implications The major thrust of the report is based on the 12.5% reduction in the footprint area for the pallet from 1165 mm square to 1200 mm * 1000 mm. As a result, it is inferred that handling costs increase by 12.5%, trailer efficiency is reduced, labour costs increase, warehouse-racking utilisation reduces and there is a need to increase warehousing area and provision of racking locations by the same proportion. Over 80% of the overall capital cost is captured by two key elements relating to racking adjustments and increased warehousing requirements. 5 million racking locations to be adjusted at $45 per location, assuming no overhang is tolerated, leading to a one off cost of $225 million Whilst a four percent reduction in storage floor area is available with compression of racking, it is essential that an additional 1.3 million rack locations required at $600 each, totalling $777.6 million The analysis assumes that the migration to the new pallet standard will not absorb the under-utilisation inherent within the chain, evident due to the proliferation of carton sizes, particularly ISO carton standards.

Figure 5-1 Composition of capital cost elements identified within the GISCC report

1,400 1,200 1,000 800 600 400 200 Estimated capital cost Modification to existing pool Additional pallet requirement Modification to pallet machinery Modification to existing rack / MHE Storage facility for additional pallets Modification to transport fleet

The Symonds Henderson report ( commissioned by the Grocery industry) recommended the retention of the Australian pallet standard, however based as much as 80% of the financial justification on increased warehouse expansion costs, a finding which is not generally accepted from the survey conducted within this study. 5.1.1 Key issues addressed The report is comprehensive in its analysis of equipment interface and operating costs, dealing with pallet and ancillary equipment modification costs.

5.2

Efficient Unit Load study by A.T. Kearney

In 1997, global consulting firm AT Kearney undertook a seminal study regarding supply chain efficiency and the relevance of harmonisation of standards. The context of the study is generally limited to grocery manufacturers and distributors. The study assessed the implication of co-ordination within supply chains in a concept labelled “Efficient Consumer Response”. Within the study,

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analysis was given to the importance of Efficient Unit Loads (EUL), and this study importantly draws on the findings of AT Kearney. For a more detailed explanation on EUL in the Appendix under Section 14.2 A summary of the key findings is available at http://www.ecrnet.org and key findings include Efficient unit loads impact 12-15% of retail sales price. Savings opportunities represent 1.2% of retail sales price in the European context. Unit load harmonisation is key to supply chain integration and break through results Projected savings are not evenly spread among manufacturers and retailers, with the latter group expected to gain three quarters of the benefit The GISCC report which is summarised in the previous section identified the importance and value of the EUL principle and identified that a saving of 1.64% of retail sales is possible. Based on the estimate of $54 Billion for Consumer–grocery/food products, the implications of ECR/EUL equate to $850 million reduction in chain costs. If non grocery and household products are added to this group, totalling $101 Billion, benefits arising from EUL would yield $1.6 Billion in chain savings.

5.3

Efficient Consumer Response (ECR) : a survey of the Australian grocery industry

This study and report was co-authored by John Harris, Paula M.C. Swatman and Sherah Kurnia and was published in the journal “Supply Chain Management: An International Journal” (1999), Volume 4, Number 1, pp35-42. The paper presents the results of an Australian study which was designed to assess the applicability of ECR within the Australian grocery industry. A copy of the full text is provided in the Appendix 14.3 on page 83. Whilst ECR represents a broader, contextual issue surrounding pallet and carton standards, the report made a number of substantive statements worth incorporating herein.
“The goal of ECR is to take out of the supply chain costs which do not add consumer value (Robins, 1994). ECR is about producing efficiencies in the grocery supply chain within the four core business process areas of efficient store assortment, efficient replenishment, efficient promotions and efficient product introductions (Kurt Salmon Associates, 1993).” “There is considerable interest in ECR in Australia, with 61 per cent of respondents being aware of ECR and 40 per cent of respondents actively pursuing an ECR strategy). Despite this interest in ECR, we believe that there is no real commitment to its implementation.” “One of the main reasons given for adopting ECR is pressure from trading partners. These results, which differ significantly from the (comparatively limited) evidence available from the USA, suggest that the Australian motive for engaging in ECR may well be quite different. Indeed, the likelihood is that Australian grocery industry members appear to be "encouraged" to engage in ECR by large and powerful customers (supermarkets) - a situation which is reminiscent of the Australian experience with EDI. There is thus a real danger that, as with EDI, organisations may become involved only to the extent required by their larger and more powerful trading partners, so that the full benefits of a strategic approach may be lost.”

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Domestic and International pallet standards Operational and cost implications justification on increased warehouse expansion costs, a finding which is not generally accepted from the survey conducted within this study. An ECR study conducted in 1999 outlined the strategic relevance of ECR within the Australian Grocery industry, and questioned the motives being pursued and the inherent balance of power therein. It found that deficiencies may cause the strategic benefits to be lost. ECR Asia has undertaken extensive research and development on this issue, recommending implementation of the 1200 * 1000 mm pallet, which will have significant implications for Australia’s future import and export trade and supporting logistics systems.

5.4

ECR Pallet Implementation Project: Apaper provided ECR Asia (Singapore)

A full copy of the report is provided in Appendix 14.1 on page 72 The results of the study identified substantial benefits and savings by adopting the ISO standard through South East Asia. The outcome of the study provides a stark contrast to the results of the GISCC report referred in section 5.1 on page 16. However it must be recognised that whilst the principles are consistent, the relative immaturity of the Asian situation would yield significant benefit, which may not follow with a more mature environment such as Australia, having already established substantial infrastructure costs.

5.5

Conclusions

The pallets standards issue has been an integral part of the global debate of the benefits of ECR (Efficient Consumer Response) and EUL (Efficient Unit Loads) strategy. Global consulting firm AT Kearney undertook a seminal study in 1997 and identified that substantial benefits can be realised by harmonising the carton size to the pallet standards, and by developing processes that maintain load (and unit) integrity as far along the supply chain as possible. Such benefits are between 1.21.6% of sales values. The Symonds Henderson report ( commissioned by the Grocery industry) recommended the retention of the Australian pallet standard, however based as much as 80% of the financial

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Figure 6-1 Conceptual framework linking the purpose of the pallet to the prevailing market demands and product attributes

6.
6.1

CONCEPTUAL FRAMEWORK
Preamble

The conceptual notion of a supply chain and its composite elements exists within the notion, “why do goods move?” Whilst the obvious subject of the study is the pallet and its prevailing standard, the underlying argument extends to the purpose and fit of the pallet within the supply chain. It therefore begs the question as to the need and existence of the pallet in the first instance, and if its purpose and use has been found to be “wanting”, then what item and/or process will replace the pallet. Most supply chain practitioners will share anecdotes and experiences of pallets as an item of logistics equipment. Some of those same practitioners are searching for alternatives such as slip-sheets, intermediate bulk containers/crates, and alternate materials such a plastics and compressed paper. A study into pallet standards requires a number of considerations such as: A long range view of the served market A holistic view of the supply chain The relevance of unitisation and efficiency The relationship between product (SKU), pallet and container or truck A conceptual model of the inter-relationship between markets and pallets is provided in the following diagram.

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Production Production

Flow of goods (a) Flow of goods (a)

Market Market

Product attributes • Bulk, pack type • Presentation • Value-added

Supply processes • Sources

• Channels • Methods

– regionalisation of manufacture – centralisation of supply and inventory

Demand characteristics (b) • Location of markets • Frequency and expectation • Growth
–existing –future, emerging

– integration – connectivity – unitisation

The T pp oherreat rr d el la io cc n oduc s, tions ip oo t uctt p nshh ai ntane s, p lle ipbb t a ine s/ alle s eetw e w rr t ve n s/v h tsaa d eeen ehcle nnd ii c le ss

(a) Goods may be raw materials, intermediate and finished products (b) Where demand characteristics change, then supply processes will equally need to change

Within the conceptual framework outlined in Figure 6-1 above, there is a direct relationship between the pallet (role and standard) and the served market. The issue has been treated tactically to date as pallet costs are the domain of the “firm”, and in the context of a firm’s individual potential to influence the pallet standard, the outcome for practitioners has been to move onto “the next big issue”. Yet collectively (at a national level) the pallet issue is an important element that influences the overall efficiency of the “system” servicing our market requirements.

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Domestic and International pallet standards Operational and cost implications There are three direct and one indirect supply chains relevant to Australia. These can be represented within the following diagram.
Figure 6-2 A Supply Chain Typology outlining influences on Australia's logistics processes

It does not automatically follow that harmonisation between Australia and its customers/suppliers on pallet standards leads to such efficiency if considered in isolation. Nor does such alignments justify an increase of pallet usage within containers to facilitate efficient loading and unloading. The issue is the degree to which retention or dissolution of the current standard impact higher order issues such as Carton sizing, consistent with the global ECR (Efficient Consumer Response) strategy Customer expectation relating to product presentation in overseas markets The need for single organisations to tolerate multiple pallet standards within a regional (sub-global) manufacturing or supply strategy. Changes in the market mix serviced by supply chain processes.

MARKET (Destination) Local Domestic logistics operating essentially as a closed loop and not linked to global markets or chains Overseas Export logistics servicing the demands of overseas customers, with substantial growth expected in next 10 years

PRODUCTION (Origin)

Local

Import logistics influenced by the countervailing power of increasingly large suppliers and Australia’s “appetite” for value added products

Global logistics with increasing dominance to set trends in logistics techniques, which influence supply chain and market decisions “follow the leader”

Overseas

Direct

Indirect

6.2

Supply Chain Typology

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Domestic and International pallet standards Operational and cost implications 6.2.3 Import Logistics For non-bulk freight, Australia remains a net importer of goods, sourcing over $67B trade annually from USA, Asia and Europe. With the planned consolidation of manufacturing within the Asia region, the trend to move manufacturing off-shore from Australia will see the strong import freight continue, tempered periodically by currency exchange rates and policy intervention to address trade imbalances. 6.2.4 Global Logistics Recognising that “no country is an island”, Australia’s domestic, import and export logistics processes will increasingly align with global trends influencing inventory policy, technology applications, customer service expectations, product performance and presentation and transport methodologies and economics. Supply and demand choices will occur at a global level, which will influence the degree of integration of Australia’s supply chains within regional and global chains. The degree to which global inventory processes continue to align within the ISO standard, will provide a countervailing influence of the same choices that Australia’s supply chain practitioner’s may make. Alternately, Australia may not have a choice, where economics of production and inventory pre-determine such outcomes.

6.2.1 Domestic Logistics Australia’s domestic logistics have been benchmarked to be efficient, particularly road transport processes. It has seen the emergence of dominant transport operators seeking opportunities to vertically integrate from “wharf to door”. Industry consolidation of the players is the current trend. Most transport initiatives have been founded on the east-west corridor, where cubic utilisation within the “structure gauge” for road and rail has been a strong focus. Australia’s domestic market is small and lacks density and scale economy. 6.2.2 Export Logistics The development of export markets has been seen as critical by government and industry alike, with initiative such as Supermarkets to Asia and the Habitat Alliance identifying the need to substantially increase the export of value added products or unique and quality primary products.3 Food quality attributes have continued to provide Australia with ongoing global opportunities.

3

Exports of Food products to Asia have increased from $4.8B in 1991-92 to around $13B in 2000-01 – source Supermarkets to Asia database

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Domestic and International pallet standards Operational and cost implications Table 6-1 provides a theoretical example of three scenarios experiencing different growth rates for international and domestic trade. Further explanation is provided overpage.
Table 6-1 Assessment of growth scenarios based on alternative task apportionment and predicted growth forecasts Error! Not a valid link.

6.3

Changes in market mix

There is a temporal dimension to the issue, which will impact supply chains, techniques and equipment. The land transport task linking the domestic production and consumption clusters will progressively migrate from being domestic to becoming more focused on international supply chains. Whilst this aspect is dealt with empirically in Section 9 the following paragraphs illustrate the point. The Transport and Storage Index has approximated GDP since the early 1990’s. Given that conceptual notion that transport provides a link between markets (consumption) and production, this is accepted intuitively.
Figure 6-3 Transport and storage output and gross domestic product index

Refer also to the Appendix Table 13-1 Scenarios "A" - "C" indicating growth in indices in the intervening years on page 65 From Table 6-1 the task mix in Scenario “A” is consistent with the relativity between domestic and international flows identified in the GISCC report of 1998.4 Scenarios “B” and “C” provide for alternate mixes in the task split as 80:20 and 70:30 respectively. For all scenarios, the total growth is limited to 3.5% (compound) over the twenty years to 2020. The growth in the international task is assumed to be 8% consistent with various forecasts and references. Under these criteria, the growth in the domestic task will vary to meet the overall consumption index. Scenario “A” yields a growth in the domestic task of 2.7% and yields a % task mix of 78%, against an international task of 22%.
The Grocery Industry Supply Chain Committee report titled “The Australian Pallet Study” for the Grocery Manufacturers’ Association ad the Australian Supermarkets Institute undertaken by Symonds Henderson
4

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Domestic and International pallet standards Operational and cost implications Multi-national firms are implementing regional and global strategies seeking production scales of economy and proximity to substantial markets Growth rates in market segments are expected to yield outcomes consistent with the threshold of 70% identified within the GISCC study referred in section 5.1 on page 5. The following diagram summarises the key components of logic within the study.

For scenario “B”, the domestic growth required reduces to 1.5%, with an outcome of 55% in the overall mix. For scenario “C”, a negative growth in the task is necessary with an initial task split of 70:30, yielding an a domestic outcome of 33% in the total task.

6.4

Study components

Whilst pallet standards are the subject of the study, using pallets in supply chains is only relevant to the extent that Pallets provide a fundamental and efficient means for transporting cartons Technology relating to crates, returnable boxes, and “shelf ready” packaging is being assessed as part of EUL and ECR strategies, particularly within the grocery industry. This will change the nature of the pallet, however issues relating to the “foot print standard remain critical and in need of resolution Containers move products and cartons as international trade. It does not automatically follow that pallet use within containers is any more or less efficient. The pallet is a component of transport and storage that interfaces with the container for the land transport component. Emerging opportunities for using pallets within ISO containers for coastal shipping is a secondary issue and needs to be treated as a marginal benefit. Moreover, exogenous factors such as markets and growth are relevant to the extent that Key market segments need to be assessed separately, as each has different growth rates and vary with respect to the mix of domestic and international trade

Figure 6-4 Key components of logic within the study

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Compliance with ISO standards

Prevailing standards

Towards ISO packaging standards

Alignment and efficiency of pallet standards with packaging and container standards

Towards ISO pallet standards

ISO packaging standards and domestic pallet standards

Domestic standards

Closed systems and domestic standards; may be efficient in a steady state

Current situation within Australia, due to increasing imports by multi-national firms

No te

2

No te 1

The “status quo” will lead to substantial inefficiency currently estimated to be 10-15% suboptimal utilisation

Marketing and manufacturing strategy
Domestic focus Hybrid/transitional phase 50% Globalisation and increasing connectivity 75%

Mutually exclusive decision points

0%

25%

Export and import trade as a percentage of domestic consumption

Note 1 – denotes a strategy that seeks to maintain the status quo Note 2 – proposes that decisions regarding cartons ad pallets are mutually inclusive

6.5

Conclusions

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Domestic and International pallet standards Operational and cost implications change in the market mix served by Australia’s logistics systems (and standards)

The logic and rationale for a prevailing pallet standard is derived from the conceptual notion of a supply chain and its composite elements, which exist within the notion of “why do goods move?” A study into pallets standards requires a number of considerations such as o A long range view of the served market o A holistic view of the supply chain o The relevance of unitisation and efficiency o The relationship between products (SKU’s), pallets, containers and/or trucks It does not automatically follow that harmonisation between Australia and its customers/suppliers on pallet standards leads to such efficiency if considered in isolation. Nor do such alignments justify an increase of pallet usage within containers to facilitate efficient loading and unloading. The issue is the degree to which retention or dissolution of the current standard impact higher order issues such as Carton sizing, consistent with the global ECR (Efficient Consumer Response) strategy Customer expectation relating to product presentation in overseas markets The need for single organisations to tolerate multiple pallet standards within a regional (sub-global) manufacturing or supply strategy. Changes in the market mix serviced by supply chain processes. Differential growth rates exist for domestic production, export trade, import trade and domestic consumption, which will lead to a

It is very conceivable that within the next 20 years Australia’s international trade and logistics task will reach 70% of its domestic consumption5. That is
$import + $export % international trade = ---------------------------$ domestic consumption
where domestic consumption is a “proxy” for domestic land transport

Logistics processes and standards are increasingly global in context and application, with marketing and manufacturing strategies being executed at a global/regional level by large multinationals with substantial countervailing power

The GISCC report by Symonds Henderson identified that there is financial justification to introduce the ISO pallet where international trade reached 70% of domestic grocery consumption

5

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Table 7-1 Summary of key survey participants
Revenue Domestic Domestic logistics Geographic focus Revenue Global

7.

SYNOPSIS OF SURVEY OUTCOMES
Organisation or individual Type

Export logistics

Import logistics

More than 50 individuals representing 40 organisations were interviewed to provide views and input into the study. These include: Manufacturers/Importers/Exporters Equipment providers Retailers Policy Advisers

Bachell Baxter BBC Chep Coles CRT CUB/Fosters DFAT Dexion FCL Heinz Holden IKEA JJP K&S Kelloggs Loscam

Equipment Manufacturer Retailer Equipment Retailer Services Manufacturer Policy Equipment Services Manufacturer Manufacturer Retailer Manufacturer Services Manufacturer Equipment $7000m $8000m

n/a $285m Not stated ~$140m Not stated $50m n/a $100m $500m $110m $230m $130m

Asia Global Asia Global Domestic Domestic Global Asia Domestic Domestic Asia Global Global Domestic

7.1

Respondents

The table adjacent provides a summary of the key participants assessed in terms of financial size, geographic focus, logistics scope and perceived positive or neutral support or the issue of pallet standardisation. A comprehensive contact list is provided under separate cover.

$4200m -

Not stated Global

Not stated Domestic Not stated Asia $1500m Asia $2200m Global >$1000m Global $3500m $100m $500m n/a Not stated Not stated Not stated $265m $1000m $350m $1300m Domestic Global Global Domestic Domestic Asia Domestic Asia Asia Global

Murray Goulburn Manufacturer Nestle Manufacturer P&G Manufacturer SCT Simplot Sonneveld TDG TNT Materials Toll Logistics Toll SPD UBA Uncle Toby's Unilever Woolworths Services Manufacturer Policy Services Equipment Services Services Manufacturer Manufacturer Manufacturer Retailer

-

$15000m Domestic

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Slip sheeting

Strategic design + Development

Domestic and International pallet standards Operational and cost implications Efficient Consumer Responses and Efficient Unit Load, and supported by great collaboration than has existed in the past. Stockholders are seeing more sophisticated products (crates, trolleys, slip sheeting) and alternate materials such as plastic The future of the wooden pallet is limited; the study and review process was seen to be more about the standardisation process of how individual cartons aggregate into “blocks” or “units” that comply with a universal footprint standard for international distribution. There is a clear awareness by multi-nationals that the carton and pallet size is standardizing on the ISO footprint of 1200 x 1000mm

7.2

Summary of Interviews

A summary of interviews is provided in the part two of the report under separate cover. The interview process provided an exhaustive range of perspectives with the “multinationals” providing the most strategic outlook. Service providers expressed concern regarding the impact and cost of change, whereas equipment providers expressed a degree of “neutrality”, indicating a preparedness to follow customer directions. Early within the survey process, discussion tended to pursue operational and technical perspectives, however later discussions identified the links between manufacturing, marketing, marketing policy, carton standards and pallets. This line of research led to the development of the Conceptual framework shown in Figure 6-1 on Page 20.

7.3

Conclusions

A number of consistent messages emerged from the interview process conducted within the scope of the study Supply chain philosophy in 2001 has progressed significantly since the GISCC report of 1997. Supply chain management has emerged as a critical differentiation for firms in 2001 to 2010 Manufacturing is consolidating to pursue scales of economy Supply chain processes are fundamentally changing with concepts of “shelf ready packaging” and “reverse crate flows”, emerging. This is being facilitated by strategies such as

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Domestic and International pallet standards Operational and cost implications cargoes. Such products include steel and lumber, however may be unitised dependent on destination, consignment size and so on. Goods that are almost always unitised and containerised, such and grocery and other consumer items. Products are always transported domestically on pallets, however import/export movements may employ pallets, slip-sheeting (or similar) or are hand-stacked within the container. The classification used herein will also show this in graphical form as follows.
Classification Unitised Palletised Containerised (international)

8.

MARKET CONTEXT

The application of a particular item of handling or transport equipment such as pallets and containers must be seen within the context of its market, and an assessment of the “served market” is considered worthwhile. Not all supply chains are serviced by pallets and/or containers, rather are limited to supply chains servicing specific manufactured and/or value added products. Conclusive data regarding the physical movements of these goods within supply chains is not available, however judgements can be made from an assessment of the value of the goods within specific markets. The following analysis based on the degree of unitisation6 employed will determine the relative market sizes for three (arbitrary) classifications, which are Goods that are never unitised, palletised, or containerised, and are generally bulk commodities and refined products, or automotive vehicles. Goods that are not typically palletised, and but may be containerised, and may generally be handled and break-bulk

A B C

(never) (never) (always)

(never) ? (not usually) (domestic) ? (subject to product type)

(never) (typically) (always)

The following sections develop a composite model for market segmentation, based on data from a number of sources. Manufactured goods Agricultural goods Retail markets Export and import trade Recognising the limitations and scarcity on volume data, product and trade values has been used as a proxy.

6

For the purpose of efficient definition, “unitisation” will refer to the generic practice of value adding through packaging and/or used of pallets and containers for the transport and storage of the goods

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8.1

Market Framework

8.2

Manufactured Goods

The following table provides a market segmentation model in order that the “pallet issue” is placed within an overall context for Australia’s trade and supply chain activity.
Figure 8-1 Market structure delineating key segments within supply and demand cycles
Agricultural non processed Agricultural processed(a) Manufactured goods Exports - bulk (fuel, coal, etc) Domestic bulk markets

The total value of Australian market for manufactured goods totals around $260 billion7. An assessment of these manufactured products provides the following observations. Food, beverage and tobacco is the largest category of manufactured goods, representing almost 20% by value Around 25% of the manufacturer’s sales is exported, with one quarter of exports being food, beverage, tobacco, textile, clothing, footwear and leather goods Almost 40% of the market value is served via imported goods, of which 75% are not unitised on pallets and/or containers
Table 8-1 Australian Market for Manufactured Goods
Sales incl. Exports $B Food, beverage and tobacco mfg. Textile, clothing, footwear and leather mfg. Wood and paper product mfg. Prinitng, publishing and recorded media Petroleum, coal, chemical and associated product mfg Non-metallic mineral products mfg. Metal products mfg. Machinery and equipment Other mfg. 49.9 8.4 16.3 12.2 35.7 10.4 32.2 42.0 6.4 213.5 Exports Imports Total Aust. Market $B 4.5 6.9 3.5 2.0 16.8 1.4 7.9 56.1 3.1 102.2 41.2 12.7 18.4 13.7 45.6 11.5 21.8 84.2 8.7 257.8 Likely unitisation class

Industrial markets Consumer grocery Consumer non grocery Exports containers

$B 13.2 2.6 1.4 0.5 6.9 0.3 18.3 13.9 0.8 57.9

$B

C C B B A A B B B

Intermediate manufactured goods Imports

(a) ABS data for Manufactured goods includes processed agricultural inputs denotes segment dimensioned and relevant to study

Total mfg.

(a) Imports by industry of origin (b) Manufacturers' sales less exports plus imports (C) Plastics polymers are distributed either as bulk, semi bulk or packaged (d) Includes $2b for production of soaps and powders, and cosmetics

Source ABS – Manufacturing – 8225.0 - 2000
7

ABS publication: Manufacturing (Cat. no. 8225.0) 2000

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Figure 8-2 Subdivision (by value) of Australian manufacturing (including imports and exports) by unitisation class

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Subdivision by value of Australian Manufacturing totalling $260 B
Never unitised 22% Not usually unitised 49% Almost always unitised and palletised 29%

8.3

Agricultural Goods

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Domestic and International pallet standards Operational and cost implications The retail trade market within Australia is valued at around $130 billion per annum8 (excluding Hospitality and Services), with grocery retail valued at $45 billion. Except for distribution of goods relating to hardware and appliance transport and distribution, most retail good are unitised on pallets and transported on vehicles or within containers.
Table 8-3 Subdivision of the Retail market within Australia
Retail category Sales$B $B 45.0 17.0 13.4 10.3 4.9 5.3 8.0 7.3 17.3 128.5 Average Gross Margin (a) 20.0 20.0 40.0 30.0 15.0 35.0 30.0 Costs (b) $B 9.0 3.4 4.1 1.6 1.2 2.6 5.2 27.1 Product value (C) $B 36.0 13.6 13.4 6.2 4.9 3.7 6.8 4.7 12.1 101.4

Australia continues to develop and grow its agricultural export sector, particularly given the perceived value and quality of Australian produce within the Asia markets.
Table 8-2 Summary of Agricultural production and export activity
Agricultural products 1998-99 Production '000 tonnes Livestock products (a) Beef Chicken Other Total Wool Rice Milk Grapes Fruit Vegetable 1,973 564 1,022 3,559 688 1,362 10,102 1,265 1,650 3,077 25,262 (a) Excludes sales of live animals (b) Processed as manufactured goods Value $m 4,476 1,018 1,753 7,247 2,140 290 2,900 1,191 1,426 1,497 23,938 Export '000 (b) (b) (b) (b) 377 655 240 113 170 45 1,600 1430 408 67 104 300 22 2,331 Value $m

Supermarkets Other food retailing Department stores Clothing and soft goods Furniture and coverings Hardware Appliances Recreational goods Pharmaceutical and other Total retail market

(a) Average gross margins ABS data 8624.0 1998-00 (b) Assumes 20% operational and other sales costs (C) Value of goods net of operating costs

Source – Retail trade – 8501.0 – July 2001

Figure 8-3 Subdivision of Retail market within Australia

8.4

Retail Markets
8

ABS publication: Retail Trade (Cat. No. 8501.0) July 2001

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Retail Trade within Australia estimated to be worth around $130 B

Pharmaceutical and other 13% Recreational goods 6% Appliances 6% Hardware 4% Furniture and coverings 4% Clothing and soft Department stores goods 10% 8% Other food retailing 13% Supermarkets 36%

8.5

Export and import trade

The total value of international trade for the 1999-2000 financial years was Imports - $110 Billion Exports - $97 Billion Whilst an analysis of imports was partially covered under 8.2 Manufactured Goods, a more complete summary is provided below, using the same classification method previously described. The analysis in Table 8-4 and Table 8-5 shows the proportion of containerised freight as a proportion of the total trade.

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For imports, trade in containers totals around $67 Billion, whereas Bulk shipments total almost $43 Billion. Containerised trade needs further dissection, to eliminate products that are not unitised and therefore not stored and handled on pallets. For export, Bulk shipments are the dominant movement type, comprising coal, grain, minerals and similar products. Container movements on unitised products total around $48 Billion, with a further $18 Billion of products which are containerised, however not unitised and therefore would not employ pallets for handling and storage. Expressed in value terms, containerised movements of unitised product have grown around 8% per annum (compounded) since 1995, and consistent with other key trade statistics. The total value of international trade for unitised product moved in containers is around $70 Billion, and represents 33% of total international trade. Consumer grocery and foods products totals around $13.5 Billion, and predominantly an export movement Consumer non grocery and household items total $15.7 Billion, and is predominantly an import movement Industrial products total $41.5 Billion, with $33 Billion in the import direction. Within the context of pallet standards, grocery and food products have demonstrated the most significant requirement for pallet usage, with household and industrial products allocating lower priority to the issue.

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Table 8-4 Summary for import trade, segmented into the unitised classification

Flow Sum of Value Market segment a) Consumer (grocery)

Import Year 1995-6

$B trade

$B trade Annual growth rate 1999-00 166 687 2,357 3,210 2,359 7,620 9,979 5,977 11,564 25,072 42,613 19,239 2,751 21,990 77,792 266 891 3,226 4,383 2,633 11,947 14,580 7,109 14,107 33,457 54,673 32,894 3,556 36,450 110,086 12.5% 6.7% 8.2% 8.1% 2.8% 11.9% 9.9% 4.4% 5.1% 7.5% 6.4% 14.3% 6.6% 13.5% 9.1%

Category Not containerised Containerised, semi bulk Unitised, in containers

a) Consumer (grocery) Total b) Consumer (non Grocery)

Not containerised Containerised, semi bulk Unitised, in containers b) Consumer (non Grocery) Total c) Industrial Not containerised Containerised, semi bulk Unitised, in containers c) Industrial Total d) Excluded Not containerised Containerised, semi bulk Unitised, in containers d) Excluded Total Grand Total

Totals from above

Not containerised Containerised, semi bulk Unitised, in containers

27,741 15,002 35,049

42,902 18,554 48,630

11.5% 5.5% 8.5%

Source: Derived from ABS 30.28 Merchandise Exports And Imports, By Commodity

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Table 8-5 Summary for export trade, segmented into the unitised classification

Flow Sum of Value Market segment a) Consumer (grocery)

Export Year 1995-6

$B trade

$B trade Annual growth rate 1999-00 4,929 2,824 7,049 14,802 553 2,412 2,965 2,692 13,876 6,592 23,160 33,813 452 34,265 75,192 4,939 1,709 10,314 16,962 598 3,715 4,313 3,716 16,185 8,044 27,945 47,451 581 48,032 97,252 0.1% -11.8% 10.0% 3.5% 2.0% 11.4% 9.8% 8.4% 3.9% 5.1% 4.8% 8.8% 6.5% 8.8% 6.6%

Category Not containerised Containerised, semi bulk Unitised, in containers

Not containerised Containerised, semi bulk Unitised, in containers b) Consumer (non Grocery) Total c) Industrial Not containerised Containerised, semi bulk Unitised, in containers c) Industrial Total d) Excluded Not containerised Containerised, semi bulk Unitised, in containers d) Excluded Total Grand Total

a) Consumer (grocery) Total b) Consumer (non Grocery)

Totals from above

Not containerised Containerised, semi bulk Unitised, in containers

41,987 17,152 16,053

56,704 18,475 22,073

7.8% 1.9% 8.3%

Source: Derived from ABS 30.28 Merchandise Exports And Imports, By Commodity

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Figure 8-4 Value of the major Market Segments for unitised goods within the Australian market

8.6

Value of Market Segments

A composite model for unitised product developed from the previous summaries is provided in Figure 8-4 opposite. This figure shows the overall value of unitised product from all sources and used within the Australian market to be around $154 B. This can be compared with the value if international trade in unitised products, which is estimated to be around $70 billion (refer to page 32). Exports and Imports for unitised product are later compared to the domestic market value.

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D om es tic m an uf on U ac N un ni tu Ex iti tis se ed d pr m od an rin po uc uf Ag To N on G pr oc es C H ar se lo dw W th ro d in ar oo El e d, ec tri ce fo g ry od an an pa ca d ta Im ts ac ric lu an an d d d ot ho pe l, tu ul ni no re tu tis pr ot he us ra el nd ec tro ti d ra nc pr lp ed oc he rv eh es rc ar ol fa ni d br c

$B

100 50 0
g rts po lu od ro pr rts de uc du od se on ie ty fu ic d d ts ct uc fo su s ts od

150

200

250

300

Market segment

Market value segmentation ($B) unitised products

Page 40 21 March 2002

Consumer grocery

m go rn ta an d Ph ed sc m ie et nt al ifi c is ar pr

er od hi m od pr s

Consumer non grocery

ng ac uc od

y ts uc ts

Domestic and International pallet standards Operational and cost implications

Industrial and "other"

Strategic design + Development

Domestic and International pallet standards Operational and cost implications The growth rate for international trade is between 8-10% (compound), whereas domestic production and consumption is around 3-4%

8.7

Conclusions

Pallets are not used in all supply chains. Generically, three types of supply chains exist for the purpose of categorisation herein, which are: o Bulk shipments o Semi bulk shipments, typically in containers or as “break bulk” consignments o Containerised movements of unitised freight (pallets, cartons, bags, etc.) o It is the third group relevant to the study Markets considered by this study are manufactured and primary products, retail markets, and export/import international trade Australia’s international trade is around $210 billion, however trade in unitised product represents around 35%, with the majority of the balance relating to shipment of bulk commodities (coal, grain, minerals, natural gas, etc.) The market value of Australia’s unitised/packaged products is around $150 billion, comprising domestic production retained and imported product, for domestic consumption. This can be subdivided into consumer grocery ($54 billion), consumer non grocery/household ($47 billion) and industrial ($53 billion). Each sub-element has differential growth rates and trade imbalances, further influencing the composition of the market mix.

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Table 9-1 Logistics volumes for relevant market segments (unitised/containerised) Corridor Local and short haul intrastate Inter-capital city movements International Road Road Rail Coastal shipping Sea freight as Import full containers Import empty containers Export full containers Export empty containers Mode Volume of non bulk movements More than 1BT9 40 MT10 10 MT 3.3 MT 17 MT 0 MT 13 MT 0 MT

9.
9.1

AUSTRALIA’S LOGISTICS TASK
The task in 2001

9.1.1 Limits of the definition and analysis Defining the Australian Logistics task has always been a complex process limited by the quality of the source data and the frequency of the survey process. This analysis will be limited to Non bulk freight movements Inter-city movements by road, rail and sea Import and export movements by sea using containers 9.1.2 Volumes relevant to the analysis (2000) Within the context of this study, Australia’s supply chains are dominated by Local and short distance interstate distribution by road Long distance distribution by rail and coastal shipping International container shipments (export and import) The volumes associated with each of these elements are shown in the following table. A conceptual model relating to the freight movements is provided in Figure 9-3 on page 42.

Source: Various BTE and BIZ Shrapnel reports

9

10

BT = billion tonnes MT = millions tonnes

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Domestic and International pallet standards Operational and cost implications 9.1.4 Rail freight movements Rail freight movements of unitised product, is undertaken within domestic and ISO containers. Domestic container sizes and configuration has been based on the domestic pallet being accommodated two wide and therefore is wider than the ISO standards pallet. There is not a consistent approach to the operation of container loading for long distance transport.
Table 9-3 Use of domestic and ISO containers within long distant freight movements

9.1.3 Road freight movements Road freight dominates the movement of product between Sydney, Melbourne, Brisbane and Adelaide. Typically, product travels between origin and destination on domestic pallets as 22 pallets per 13.7 metre trainer load (45 foot) 30 pallets per B-Double load
Table 9-2 Inter-capital road freight matrix 1998-99 ('000 tonnes)
Destination MT (1998-9) Sydney +NSW Melbourne +VIC Origin Brisbane only Adelaide +SA Other Total Sydney +NSW Melbourne +VIC Brisbane only Adelaide +SA

Other

Total

8.0 9.6 1.9 1.6 1.5 14.6 1.3 1.7 1.1 12.1

2.8 3.2 0.1 0.1 6.2

1.5 1.9 0.3 0.2 3.9

1.6 1.0 0.2 0.2 3.0

13.9 15.7 3.7 3.6 2.9 39.8

Application Domestic containers ISO containers Intercity stock transfers Direct delivery on pallets Intercity stock transfers

Loading method Hand stacking to maximise cubic capacity Product on pallets Hand stacking to maximise cubic capacity

Source: BIZ Shrapnel11

Rail movements of non-bulk unitised product totals around 10 million tonne per annum. 9.1.5 Sea freight movements Sea freight movements relevant to the study involve international maritime freight and coastal shipping freight.

11

BIS Shrapnel – Freight in Australia 3rd edition 1999-2004

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Figure 9-1 Apportionment of container flows as full and empty imports and exports in 2000
% Split of 5 major port volumes as at 2000, totalling 3.1m TEU's
Export Empty TEU's 13%

9.1.5.1 International shipping Australia’s maritime shipping task has been growing at around 8% per annum and currently totalled 3.1 million TEU’s in 1999-200012. Whilst fluctuations in the balance between imports and exports occurs from time to time, the long term average between full and empty import/export containers is shown in Figure 9-1 following. Note that these volumes include the costal shipping volumes shown in the next section, as relevant to port activity. The following table is a composite derived from various sources to provide a view of containerised freight as at 1998-9, totalling 31 million tonnes.
Table 9-4 Summary of container activity for 1998-9

Import Full TEU's 43%

Export Full TEU's 37%

Import Empty TEU's 7%

Graph and % split assumes balance of import ad export flows over the long term

Figure 9-2 5 Ports volume of container flows in 2000
'000 TEU's

Container balances - 12 months to June 2000 Full TEU's Empty TEU's

1998-9 Total shipments by sea Export (1998-9) Import (1998-9) % containers Export Import Container shipments Export Import

Volume Qty Unit 432 mt 57 mt

Value $B 90 101

700 600 500 400 300

3 % 30 %

40 66

200 100

13 mt 17 mt

36 67

0
Imports SYD Exports SYD Imports MLB Exports MLB Imports BRS Exports BRS Imports ADL Exports ADL Imports FRE Exports FRE

Note that marginal imbalances between imports and exports led to build up in container storage through 2000, however has been resolved.

12

BTE Waterline Report September 2000 – Table 9 – TEU Throughput at the Five Major Australia Ports (1995-2000)

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The percentage of 12 metre containers has been steadily growing since March 1999 from 28% to 34%13. Note that the national average is 1.33 TEU’s per container moved, and is a function of the mix to 6 and 12 metre containers. 9.1.5.2 Coastal shipping
Table 9-5 Summary of Coastal Shipping of Containerised freight To Tasmania From Tasmania To WA From WA Total Tonnes (MT) 1.5 1.4 0.4 3.3 Equivalent ‘000 TEU’s 100 90 55 10 255

Coastal shipping volumes around Australia have maintained a gross volume of around 48 million tonnes since 1995, however, has seen a strong growth in containerised freight and general freight, particularly with the advent of single and continuing voyage permits. Containerised freight moved by all coastal shipping totalled around 3.04 million tonnes in 1998-914. Today the volume is estimated to be around 3.3 million tonnes and equivalent to more than 250,000 TEU’s. This can be seen as a subset of the total 3.1 million TEU’s identified within the previous section. Coastal shipping relevant to this study relates to movements’ to/from Tasmania and Western Australia, with the balance of relating to North Queensland and Gulf shipments. For the purposes of the model developed in this study, the following volumes are identified.

The movement of empty containers to WA by sea arises out of the need for container balancing between Australian ports. Annually, around 20,000 empty TEU’s are moved from the east coast to Perth. Recognising that WA is a “net receiver” of domestic freight, most domestic containers sent to WA are returned empty to the east cost This movement can be assessed in two different ways a) The marginal cost of moving an empty container for balancing purposes is around $500 per movement, and at 20,000 TEU’s per annum, this represents a total cost of $10 million per annum. The marginal cost of returning the empty domestic container is therefore around $10 million per annum. b) The movement of an empty container represents a lost opportunity, where a parallel movement exists; such movements included road and rail movements of goods to Perth. In this context, a freight cost of $1500 per journey can be used, representing a total annual opportunity cost of $30 million.

13 14

BTE Waterline report Issue 27 – June 2001 – Table 1 (page 3) BTE Information Paper 46 – Coastal Freight in Australia (1998-99)

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Figure 9-3 Supply chain configuration incorporating road, rail and sea freight movements on unitised non-bulk products

Stock S 7-8 tu tockholding 7-8 tuns p holding rrn e s perannu r a m nnum

Freight Station FCL cargo

LCL cargo

Domestic production
70 MT 70 MT

Cargo Node (stock holding)
Local freight movement

Sea port

Import/export movements
10 MT 10 MT

Interstate freight movement road, rail, sea

Local customer
35 % 35 % 25 MT 25 MT

Interstate customer
65 % 65 % 50 MT 50 MT

Empty container repositioning

3 MT (225,0 3 MT (225,0 0 T 00 E 0 TE ’s U ’s U

Sea port

Coastal shipping as single voyage permits

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Table 9-6 Estimated volume for pallet issues per annum
Market Grouping Primary
Issues

9.2

Domestic pallet statistics

Estimated pallet issues by market sector '000 WholeRetail DistriManusale bution facturing
Issues Issues Issues Issues Issues

Totals % 30% 13% 7% 5% 5% 4% 2% 2% 1% 1% 0% 0% 11% 10% 7% 4% 1% 1% 0% 0%
Issues

The pallet pooling industry within Australia is valued at around $200 million revenue per annum, and issues approximately 40 million pallets and related equipment per annum. A segmentation by market sector is provided below. Two-thirds of the issues are utilised by the consumer marker sector, with the predominant user being the manufacturing base, despite the fact that it is the retailers that specify pallet standards within the chain.

%

Food (Other) Softdrinks Fruit and Vegetable Consumer Goods (General) Beer, Wine and Spirits Petfood Meat Pharmaceutical Confectionery Cold Storage Seafood Dairy Wood and Paper Products Miscellaneous Chemical/Mining Plastic Products Automotive Metal Products Building and Construction Industrial Equipment Totals %

Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial

100 400 100 100 100 200 500 1,500 4%

11,200 5,000 600 1,000 1,300 1,300 600 700 200 3,700 300 2,600 1,200 300 100 100 30,200 76%

300 500 800 400 200 100 300 200 100 2,900 7%

100 100 0%

300 1,300 100 200 200 3,200 5,300 13%

12,000 5,000 2,800 1,800 1,800 1,400 800 800 200 200 4,200 3,800 2,800 1,400 500 300 100 100

26,800

67%

13,200 40,000 100%

40,000 100% 100%

Source: Industry data based on 2000-1 full year

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9.3

Growth forecasts

9.4

Transport indicators

The following table summarises a set of key market indicators to be used in subsequent analyses, particularly relating to the growth in task and change in the task mix over the next 15 – 20 years.
Table 9-7 Summary of key market indicators
Key Market indicators 1992-3 $B 49.3 64.7 114.0 2000-1 $B 58.7 88.3 147.0 Years 8.0 8.0 8.0 % annual growth rate (compounded) 2.2% 4.0% 3.2% % annual growth rate (compounded) 2.9% 3.1% 1.7% 2.9%

Growth within international and domestic supply chains demonstrates the fact that while the overall task has been growing at around 3-4% per annum (compound) consistent with GDP, the mix of the task has seen contrasting growth.
Figure 9-4 Transport and Storage output and Gross Domestic Product15

Retail turnover (sales+profit) Consumer - grocery/food Non grocery/other Total

Indices of Industrial production Manufacturing Food/Beverage Metals Total Industrial

1991-2 Index 82.1 82.2 83.1 83.0

1999-0 Index 102.8 104.7 95.3 104.7

Years 8.0 8.0 8.0 8.0

Manufacturers Sales and inventory (Chain volume measures) 1992-3 $B 187.1 26.0 2000-1 $B 233.6 31.8 Years 8.0 8.0 % annual growth rate (compounded) 2.8% 2.5%

Sales Inventory

Growth in port throughput has been around 8-9% compounded growth since June 1993, as shown over page.

Source : ABS Australian Economic Indicators 1350.0

Figure 9-5 Trend analysis for container throughput for the five major ports16
15

BTE Transport Indicators sourced from www.dotrs.gov.au/bte/docs/indicate/transgdp.htm

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9.5

The market mix of the logistics task

Assessing the need for “harmonising” pallets and containers, exists within an assessment of the relative size of key market segments for international and domestic markets and flows.
Export markets

Production

JB Were and Macquarie Equities have identified that whilst container growth volumes are expected to be around 5-7 percent in fiscal 2002, the long-term forecasts, estimates of 8 to 8.5 percent are expected17.

International production

Domestic consumption (as proxy for domestic transport)

From the preceding, domestic transport follows the demand in domestic consumption, whereas, international transport (and the need for ISO containers) is experiencing growth rates double that of domestic consumption. The following table provides a composite summary derived from the preceding sections, and based on the total $154 Billion, being the value of the unitised product within the market. The modelled growth (b) reflects a more conservative forecast than reported in the various data references used, and maintains logic within the internal relationships of the data when extrapolated 20 years.

16

BTE Transport Indicators sourced from www.dotrs.gov.au/bte/docs/indicate/totcont.htm 17 Australian Financial Review – 20 June 2001 – “Corrigan pushes ahead with Lang Corp transformation”

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Domestic and International pallet standards Operational and cost implications From the table, International trade for Consumer/grocery/food is around 25% of the domestic consumption, and expected to grow significantly, aligned with growth in export agri-business Consumer/non-grocery/household products yield around 33% international trade as a % of domestic consumption Industrial products yields a significant 75% for the same measure. Table 13-3 on page 68 titled “Assessment of growth scenarios based on alternative task apportionment and predicted growth forecasts” provides annual estimates for growth, and indicates the importance of international supply chains and sources of supply and demand.

Table 9-8 Summary of the current and modelled growth by market sector
Product, consumption and trade values for containerised products Comsumer (Food/grocery) Dom. Production Export Import Dom. Consumption Current Growth (a) 11.6% 9.2% 2.6%

Modelled Growth (b) 4.2% 10.0% 9.0% 2.6%

2001 61 10 3 54

Product, consumption and trade values for containerised products Consumer (Household) Dom. Production Export Import Dom. Consumption

Current Growth 13.5% 14.2% 4.6%

Modelled Growth 4.3% 9.0% 7.0% 4.6%

2001 39 4 12 47

Product, consumption and trade values for containerised products Industrial/Other Dom. Production Export Import Dom. Consumption

Current Growth 5.5% 8.4% 3.3%

Modelled Growth 0.9% 4.0% 5.0% 3.3%

2001 29 8 32 53

9.6

The task in 2020

The following charts indicate the potential market values for each market segment for years 2010 and 2020, based on the forecasts in Table 9-8 and Table 13-3

Product, consumption and trade values for containerised products Total Dom. Production Export Import Dom. Consumption

Current Growth

Modelled Growth 3.7% 8.2% 5.9% 3.5%

2001 129 22 47 154

Ratio international trade to consumption Comsumer (Food/grocery) Consumer (Household) Industrial/Other Total

25% 33% 75% 45%

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$B value 120 Consumer - Non Grocery and Household market growth

Figure 9-6 Consumer (Grocery and food) - Market value estimates based on growth forecasts
$B value 160 140 120 100 80 60 40 20 2001 2010 2020

Consumer - Grocery and food market growth

100 80 60 40 20 2001 2010 2020

Dom. Production
Dom. Production Export Import Dom. Consumption

Export

Import

Dom. Consumption

Figure 9-8 Industrial/Other - Market value estimates based on growth forecasts
$B value 120 100 80 60 40 20 2001 2010 2020 Industrial and "other" market growth

Figure 9-7 Consumer (Non-Grocery and household) - Market value estimates based on growth forecasts

Dom. Production

Export

Import

Dom. Consumption

Figure 9-9 Totals (All market segments) - Market value estimates based on growth forecasts

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All markets growth

$B value 350 300 250

Ratio % of international trade to domestic consumption
120% 100% 80%

200 150 100 50 2001 2010 2020

60% 40% 20% 0% 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Dom. Production

Export

Import

Dom. Consumption

Comsumer (Food/grocery) Industrial/Other

Consumer (Household) Total

9.7

Implication of the future task

International trade and the supporting supply chains will become increasingly more important over the next 15 – 20 years for Australia’s logistics processes. Consumer/grocery/food products will see international trade increase to be around 70-80% of its domestic consumption Consumer/non-grocery/household products will increase to around 40-60% of its domestic consumption Industrial products will yield an outcome where the international trade will equal its domestic consumption. The following chart derived from Table 13-3 shows the expected growth and fundamental change in the market mix and logistics task.
Figure 9-10 Forecast trade and consumption comparisons by market sector and total

Overall, for all market sectors, trade for unitised/containerised products will increase to be around 70-80% of domestic consumption. Australia’s domestic land transport activities will become increasingly connected to international supply chains and processes For export-oriented products, standards (and processes) will become a function of market expectations for product quality, carton size and value added features Australia’s capacity to increase its export markets will require products that fit overseas distribution systems, and provide efficient means of supply to those markets. For import-oriented products, standards (and processes) will become a function of the prevailing production scales of economy. Multi-national producers are economising on product range and reducing product heterogeneity. Markets will need to develop and establish distribution systems that efficiently handle products that comply with global standards.

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Product, consumption and trade values for containerised products Comsumer (Food/grocery) Dom. Production Export Import Dom. Consumption Dom. Production Export Import Dom. Consumption Dom. Production Export Import Dom. Consumption Dom. Production Export Import Dom. Consumption Current Growth (a) 11.6% 9.2% 2.6% Modelled Growth (b) 4.2% 10.0% 9.0% 2.6% 4.3% 9.0% 7.0% 4.6% 0.9% 4.0% 5.0% 3.3% 3.7% 8.2% 5.9% 3.5% 2001 $B 61 10 3 54 39 4 12 47 29 8 32 53 129 22 47 154 2010 $B 85 24 7 68 56 8 22 70 33 11 50 71 175 44 79 209 2020 $B 134 63 16 88 86 19 43 110 34 17 81 98 255 99 141 297

9.8

Conclusions

Whilst substantial reform has focussed on domestic transport within Australia across road, rail and coastal shipping segments, it will become more critical that Australia’s transport systems are integrated with international supply and demand markets and delivery channels Products manufactured in Australia for export markets will need to meet customer expectations for packaging storage and transportability. Secondly these products must not also conform to customer systems, without transferring non-conformance costs along the chain. To fail to appreciate this dynamic will cause o Customers to source products from alternate sources o Manufacturers to nominate alternate economies for their production platforms Global manufacturing and brand managers are consolidating with a focus on Asia. Where Australia’s standards and systems do not comply with the systems developed by these firms, the total landed and distributed cost of goods will increase for Australia’s consumers Trade in products which are unitised/containerised will substantial increase as a percentage of domestic consumption.
Table 9-9 Growth rates and value by market segment forecast for 2010 and 2020

Consumer (Household)

13.5% 14.2% 4.6%

Industrial/Other

5.5% 8.4% 3.3%

Total

Ratio international trade to consumption Comsumer (Food/grocery) Consumer (Household) Industrial/Other Total

25% 33% 75% 45%

46% 43% 86% 58%

90% 57% 99% 81%

(a) Based on ABS Economic indicators against market values (b) Composite forecasts derived from ABS Economic indictaors and adjusted to reflect volume growth in contaier 1995-2000

Container movements and volumes relevant to the pallet standards issue are o Imports – 375,000 TEU’s o Exports – 400,000 TEU’s o Coastal shipping Tasmania - 190,000 TEU’s Other - 35,000 TEU’s The movement of empty ISO containers to WA and empty domestic containers from WA yields a marginal cost around $20 million per annum and also represents an opportunity cost of $40 million

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recognising that parallel freight movements by rail and road are undertaken. It is considered that harmonisation between ISO containers and the product footprint (pallet) would address this cost, whether considered in a marginal or opportunity cost treatment. Australia’s pallet pool system is valued at $200 million per annum, and generates around 40 million pallet issues. There are around 15 million pallets in circulation

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Domestic and International pallet standards Operational and cost implications Japan and Korea represent around 15% (by volume) of Australia’s export trade and 10% of the import trade. The following sections provide more detailed analysis of import/export trade volumes as measured by containers o Growth trends 1995 – 2000 o Distribution of container volumes across unitised and non unitised package types o Distribution of volumes by pallet standard and growth trend
Table 10-1 Geographic distribution of pallet standards
1200 * 1000 1219 * 1016 USA Canada Mexico Chile United Kingdom Netherlands Finland South Africa Singapore Hong Kong Malaysia Indonesia Thailand Phillipines New Zealand India * Middle East * * emerging 1200 * 800 1100 * 1100 1165 * 1165

10. PALLET USAGE AND INTERNATIONAL TRADE
There are for prevailing pallet standards adopted globally. Table 10-1 provides a summary of geographical distribution of pallet standards. The dominant regions of most influence to Australian trade are China/South east Asia/North America, which utilise the ISO pallet of 1200 x 1000mm. Around two thirds of Australian trade is with countries that utilise the ISO standards. Considerable debate is underway in Europe to align pallet standards. In that region there is an unwavering belief that the ISO standard provides operational benefits through reduced handling occurrences. A key advantage us the carton modularity/standard of 600 x 400mm, which provides for harmonisation with wither pallet standard. The document pallet standard in Japan and Korea is the 1100 x 1100mm pallet, however Korea appears to “tolerate” a proliferation of pallet sizes with the 1200 x 1000mm ISO pallet being the second most popular standard. Discussion with a number of sources have indicated a measure of frustration by multinationals and ECR Asia, regarding Japan’s reluctance to embrace the ISO standard. However, it is considered that Japan (like Australia) will not be able to resist the emergence of the ISO standard over the long term.

Germany France Italy Spain Sweden Switzerland Austria

Japan Korea

Australia

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10.1

Import-oriented containers

10.2

Export-oriented containers

Import orientated containers conservatively around one third of import containers carry unitised product which is transferred to pallets on arrival. Product imported from countries that use ISO pallets account for around 60%, growing at 5% per annum. By volume, imports are growing at 6.5% per annum.

Around 35-40% of export containers carry product which are regarded as unitised, with almost 70% by volume bound for export markets utilising ISO containers. Growth to markets that utilise the ISO pallet is 10% per annum compounded, whereas growth to markets using the 1200 x 800 Euro pallet is 17%. These markets account for 80% of exports.
Table 10-4 Export containers by market segment and pack type Error! Not a valid link.

Table 10-2 Import containers by market segment and pack type Error! Not a valid link.

Table 10-3 Import containers by pack type and pallet standard at origin Error! Not a valid link.

Table 10-5 Export containers by pack type and pallet standard at destination Error! Not a valid link.

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10.3

Conclusions

Trade to/from containers that use ISO pallets account for 60-70% by volume, with imports growing at 5% and exports at 10% The following table summarises the key results.
Table 10-6 Container movements by pallet standard

Pallet size 1100 x 1100 1200 x 1000 1200 x 800 Non Standard TOTAL
‘000 TEU’s % total % growth ‘000 TEU’s % total % growth ‘000 TEU’s % total % growth ‘000 TEU’s % total % growth ‘000 TEU’s

Imports 35 10 9 230 62 5 90 24 10 15 4 6 370

Exports 62 16 3 275 69 10 40 10 18 23 5 10 400

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11. OPERATIONAL IMPLICATIONS
The operational elements inherent within the pallet standards debate can be identified as follows: Changes to warehousing and racking requirements resulting from pallet sizes changes Cartons standards and perceived and real costs associated with a proliferation of carton sizes and additional stock keeping units (SKU’s) Cubic utilisation within the pallet envelope (as footprint times the number of layers L * W * H) Pallet loading and configuration onto trucks Labour impacts resulting from increased number of items to be handled/lifted Associated ancillary and mechanical handling equipment Physical adjustments to the pallet The debate over the last five years focussed on operational and tactical issues and the cost of adjusting infrastructure to accommodate the ISO pallet standard. The GISCC study summarised in section 5.1 on page 5 of this report identified substantial benefits of harmonising the carton to the pallet, which was on the whole sufficient to offset the cost of infrastructure adjustment; such capital costs were estimated to be $1.1 Billion, of which 75% related to warehousing expansion and racking adjustment.

11.1

Arguments to retain 11652 pallet

Operational arguments supporting the retention of the Australian pallet can be summarised as follows: A change to the ISO pallet will lead to a 12.5% reduction in the pallet foot print, which in turn increases the number of handling occurrence to move the same volume of freight. Labour costs therefore increase. The area set aside for racking can be decreased by 4% to accommodate the same number of pallet locations, offset by an increase in pallet locations by 12.5% to accommodate the same volume of freight. Racking costs to dismantle, re-fabricate and reassemble to the new configuration Road trailer utilisation would decrease by 3%, from 94% to 91%, due to a change in pallet foot print, which could be offset by wider trailer dimensions (to 2.6 metres) or a greater proliferation towards 14.6 metre trailers (48 foot) Aligning pallets to ISO containers does not lead to loading product into containers on pallets, due to a loss of cubic utilisation around 1015% Overall cost benefit is negative

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11.2

Argument to adopt ISO pallet

11.3

Storage issues

Operational arguments supporting the introduction of the Australian pallet can be summarised as follows: Global manufacturing and logistics processes are dominated by the ISO standard (60-70%), and the ongoing delay for adopting the standard will increase the current inefficiencies, where ISO cartons are stored on 1165 mm2 pallets. The inefficiencies are already accommodated within the supply chain, and harmonising on the ISO pallet will remove the inefficiencies with the need for increased capacity and infrastructure. The reduction in footprint can be accommodated by increasing the number of layers on a pallet, typically providing 15-20% increase in volume to footprint. GISCC report identified “the catalyst needs to revolve around a standard set of carton sizes conforming with the pallet dimension chosen”. Adjusting the carton size to fit the Australian pallet contradicts the countervailing trend towards ISO cartons If Australia is to grow, then it needs to become export focussed, recognising that fact that it must present products that conform to its customers’ systems and avoid cost transfer. Should this not occur, then the overseas markets will source product from other suppliers/countries. As manufacturers consolidate their manufacturing effort, Australia needs to concurrently structure its supply chain based on alternate points of supply and standards. Cost benefit assessments justify an adjustment in the short term, rather than ongoing non-conformance costs that escalate into the future

The GISCC Report in 1997 identified Optimising pallet fit on the 11652 pallet generates the maximum benefit (average 10% efficiency gain); this assumes optimisation based on 580x x 387mm carton, which does not comply with global standard of 600 x 400mm carton. If pallet fit were optimised concurrent with a move to the 1200 x 1000mm pallet, the net (after capital investment) averages 1% savings could offset the investment. Given global trends over 15-20 years, it is unlikely that harmonising around the 580 x 387 mm module would occur. The following diagram summarises the point.
Pallet integrity maintained Products re-palletised into new configuration, increasing handling costs

ISO carton sizes harmonised for ISO pallet

ISO carton sizes and configuration transferred to Australian pallet, causing overhang and under-utilisation

ISO cartons re-configured for Australian pallet leading to under-utilisation of foot print

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Where the ISO pallet configuration I s placed on an Australian pallet, there is overhang by 35mm in one direction and underutilisation by 165mm in the other direction. The net outcome is an under utilisation of the Australian pallet. This aspect was observed and discussed by contributors to the study. Where ISO cartons are re-configured there are handling costs and similar under utilisation in the footprint, due to “indivisibility” of the carton unit. Carton manufacturers based on ISO standards will only head to optimal utilisation if used in conjunction with ISO pallets.
Pallets separate each layer of products to facilitate “put away” processes at the retail distribution centre

11.4

Pallet and order make-up

There is an increasing trend to ordering smaller quantities more frequently, which provides Lower inventory High stock through put velocity This has seen the emergence of the various pallets of multiple products. The prevalence of the rainbow pallet provides increased flexibility when “mixing and matching” for load make up and optimal cubic utilisation of truck and container space. This has a direct relationship when considering truck interface issues, referred to in the next section.
Homogenous pallet Single product

Trend towards ordering SKU’s in smaller quantities and the formation of “rainbow” pallets

Heterogeneous pallet Multiple products • know as a “rainbow” pallet • product ordered as layers

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Figure 11-1 Various combinations for trailer length and pallet size

11.5

Vehicle interface

Migration to the ISO pallet is not considered to yield any significant impacts on vehicle efficiency. Considering the common 13.7mm (45’ trailer), which carries 22 x 11652 pallets and provide a total footprint of 28.8m2, a reduction of only 3.7% A number of key issues emerge Unlike container traffic, road trailers typically “weigh out, before they cube out”. Refer to Figure on Page The prevalence of rainbow pallets provides an opportunity to utilise the 30-40% free space typical in a trailer load Migration to a 14.6m (48’ trailer) would yield an 8% increase in footprint over the 13.7m trailer carrying 24 ISO pallets. The same trends exist for B double trailer configuration.

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Trailer length = 45 ft or 13.7 m Trailer length = 45 ft or 13.7 m Floor length, excluding end walls = 13.55 Floor length, excluding end walls = 13.55 2.33 m plus tolerance

Domestic and International pallet standards Operational and cost implications

22 pallets @ 1.36 m2 = 29.9 m2 Australian pallet size

11 x 1.165m plus tolerance = 13.1 m

Trailer length = 45 ft or 13.7 m Trailer length = 45 ft or 13.7 m Floor length, excluding end walls = 13.55 Floor length, excluding end walls = 13.55 2.2 m plus tolerance 24 pallets @ 1.2 m2 = 28.8 m2 ISO pallet size

No N vie ote t view,te tha de w a hat d deno , and t dia noted nd th ia r g te b th gram d b e tra am s yt et i y the ra le s are r he ar iler a are in r ea a ea in PL ar ea in rea is PLAN in bla is AN black ck

11 x 1.2m plus tolerance (20mm) = 13.4 m

Trailer length = 48 ft or 14.6 m Trailer length = 48 ft or 14.6 m Floor length, excluding end walls = 14.5 Floor length, excluding end walls = 14.5 2.2 m plus tolerance 26 pallets @ 1.2 m2 = 31.2 m2 ISO pallet size

11 x 1.2m + 1 x 1.0m plus tolerance (20mm) = 14.45 m

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Figure 11-2 Trailer utilisation, showing under-utilised capacity
Cubic capacity of pantechnicon or tautliner = 13.55 x 2.4 x 2.3 m = 75 m3 40% unused capacity 1.2-1.6m pallet height

2.2-2.4 m height

Cubic capacity of product on 11652 pallets = 22 x 1.165 x 1.65 x 1.5 = 45 m3

11.6

Container loading

A considerable proportion of unitised freight is hand stacked into containers for international or coastal shipments, due to Mismatch between the dimensions of Australian pallets, and the internal dimensions of the ISO container Different pallet sizes and configurations between Australian and overseas supply and demand points Inadequate or alternate handling methods

Low take-up of slip sheeting as a handling method in lieu of pallets Limited cooperation/coordination between origin and destination handling points, and a resolution to accept the status quo A number of organisations interviewed outlined their desire to utilise the ISO footprint to facilitate efficient container loading techniques.

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Figure 11-3 Demonstrates the difference in loading/unloading techniques

Typical method 1200*1000 ISO pallet ISO container

Sea journey 1165*1165 Austn pallet

Handstacking of cases into the container to maximise the cubic capacity; stacking integrity lost

Unloading by hand to Australian pallet

Under-utilisation of Austn. Pallet footprint

Unitised method 1200*1000 ISO pallet

Sea journey ISO container 1200*1000 ISO pallet

Pallet removed from product base; stacking integrity maintained through alternate handling techniques (eg. Slip sheeting)

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11.7

Conclusions

The decision and supporting logic can be summarised in the following matrix.
Table 11-1 Matrix for operational decision criteria 1165 * 1165 mm pallet Current situation identified as yielding 10% inefficiency in utilisation. EUL analysis identifies 1.2-1.6% cost to sales of such inefficiencies Recommended in GISCC report to be of significant benefit, if harmonised however ignores global trend towards ISO carton standards Increasing trend in this direction will proliferate current inefficiencies further 1200 * 1000 pallet Given certain % of case sizes are based on the ISO standard, this option may absorb under-utilised capacity (and “slack”) Not considered as a viable option

Current carton sizes

Cartons based on 580 * 387 module

Cartons based on 600 * 400 module

Potential to off set near term adjustment costs for infrastructure 60-70% global activity based on ISO standard for cartons and pallets

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Domestic and International pallet standards Operational and cost implications movements which yields benefits of $150 million per annum by year 7. Operating cost provision peaking at $100 million in year 10, to cover marginal expenditure for labour, forklift hire and consumables such as slip sheeting. This is a broad estimate only. The model assumes growth consistent with the Table 13-3 on page 68 in the appendix The model accommodates implementation over the first 10 years, and limits benefits to a maximum of 20 years. Not included within the calculation are operational or opportunity costs arising from to balancing and moving empty ISO containers around the nation while maintaining and operating a domestic container fleet in parallel maintaining two production standards based on Australian and ISO carton and pallet configurations

12. FINANCIAL ANALYSIS
12.1 Framework

It is beyond the scope of this study to develop industry specific or user specific financial analyses and justifications for the introduction of the ISO pallet. Rather it is the intention herein to incorporate only the strategic elements relating to: Implementation of EUL based on the ISO standards18. The benefits associated with EUL are reported to be between 1.2% and 1.6% of sales, and would represent value foregone if Australia maintained or expanded its distribution processes based on the current pallet standards Capital costs associated with converting the pallet pool to the ISO standard; previously estimated to be around $7.00 per pallet. The model assumes a provision for $150 million, expanded over 10 years. Similar adjustments are assumed for pallet machinery and racking at $50 million and $400 million respectively over 10 years Operating benefits associated with unitised loading and unloading of containers for international trade and coastal shipping

12.2

Cost Elements

Table 12-1 over page summarises the key differences that exist between the GISCC study and this study for ILN. The ILN study provides for a wider scope within the market and incorporates EUL benefits. and the secondary benefits of container loading/unloading efficiency

18

To harmonise carton and pallet sizes based on the Australian standard ignores the global trend towards the ISO standard, the expected demands/standards within new export markets, and the rationalizing and implementation of global manufacturing

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Table 12-1 Summary of cost elements within financial summary
Cost Element GISCC report $m Market segment Grocery Non Consumer Grocery Industrial Non unitised products Pallet population (2001) Pallet locations (2001) Block stacked location Product values per pallet ($) Grocery Non Consumer Grocery Industrial Pallet throughput (millions) Grocery Non Consumer Grocery Industrial Capital costs Modification to existing pool Additional pallet requirement Modification to pallet machinery Modification to existing rack/MHE Storage facility for additional pallets Modification to transport fleet Operational costs Labour MHE equipment Operational benefits Container loading for international Container loading for coastal Inventory and ECR benefits Harmonise carton to pallet @1.2% Grocery Non Consumer Grocery Industrial
Assumes harmonisation applicable to part inventory at the benefit applicable to Europe; Australia rate at 1.64% for grocery only

ILN study $m 54,000 47,000 53,000 20.00 10.00 10.00

Notes

30,000 10.35 5.00 5.35

1,500 2,500 3,500

1,500 2,500 3,500

20 -

36 19 15

72.5 27.0 21.0 225.0 777.6 72.0

150 0 50 400 0 0

Increased for wider population Additional pallet requirement addressed with organic growth and harmonisatio with carton sizes Marginally increased to allow for inflation Indicative cost as pro-rata Ignored as inventory levels declining, stock turns increasing and harmonisation with carton sizes tack up available slack in pallet under-utilisation Ignored as loading is becoming increasingly heterogeneous, allowing for mix ad match of pallets and products; footprint less that 5% difference

45.6 17.2 50

Nominal provision, although not consisdered likely Allow for increased cosnumerable for slip sheets for 10 million sheets used per annum, at 3 "re-uses" at $20 each, plus increased lease costs for equipment Assumes that product integrity is maintained and product loaded into containers in pallet lots using slip sheets or similar

25.3

116 34 150

As at 2001, 775,000 TEU's handled which are loaded with unitised freight, @ $150 per TEU As at 2001, 225,000 TEU's handled which are loaded with unitised freight, @ $150 per TEU

Note 1

-

486 282 159 927

Assumes 75% inventory Assumes 75% inventory Assumes 50% inventory

Note 1. GISCC study considered the benefits of ECR/EUL strategies external to the question of pallet standards

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12.3

Discounted cash flow and NPV assessments
Markets Inventory benefits Operating Costs Operating benefits Capital costs Net Cash flows Inflation factor Inflated cash flow

Table 12-2 Project inventory and other costs and benefits

Growth

Growth

Growth

Share

Share

Share

Growth

Growth

@ $175/TEU * Eff. Rate

Growth

@ $175/TEU * Eff. Rate

2.6%

4.6%

3.3%

75% 1.2% $M 49 100 153 210 269 332 397 465 537 612 628 645 661 679 696 714 733 752 771 791

75% 1.2% $M 42 88 139 194 253 318 388 464 546 634 663 694 726 759 794 830 869 909 950 994

50% 1.2% $M 32 66 102 140 181 224 270 319 371 426 440 454 469 485 501 518 535 552 570 589 $M 123 254 394 544 704 874 1,055 1,248 1,454 1,672 1,731 1,793 1,856 1,923 1,991 2,062 2,136 2,213 2,292 2,375 $M 10 20 30 40 50 60 70 80 90 100 100 100 100 100 100 100 100 100 100 100

8%

8%

$ 175.00

5% $ 175.00

150

50

400

Racking adjustment

Pallet Pool mods.

Coastal shipping

Pallet machinery mods.

Efficiency rate

International shipping

Export TEUs

Import TEUs

Non grocery

Non grocery

Total TEUs

Industrial

Industrial

Grocery

Grocery

Total

Year

3%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

$M 54,000 55,404 56,845 58,322 59,839 61,395 62,991 64,629 66,309 68,033 69,802 71,617 73,479 75,389 77,349 79,360 81,424 83,541 85,713 87,941

$M 47,000 49,162 51,423 53,789 56,263 58,851 61,558 64,390 67,352 70,450 73,691 77,081 80,627 84,335 88,215 92,273 96,517 100,957 105,601 110,459

$M 53,000 54,749 56,556 58,422 60,350 62,342 64,399 66,524 68,719 70,987 73,330 75,749 78,249 80,831 83,499 86,254 89,101 92,041 95,078 98,216

000 000 TEUs TEUs 375 400 405 432 437 467 472 504 510 544 551 588 595 635 643 686 694 740 750 800 810 864 874 933 944 1007 1020 1088 1101 1175 1190 1269 1285 1370 1388 1480 1499 1598 1618 1726

000 TEUs 775 837 904 976 1,054 1,139 1,230 1,328 1,434 1,549 1,673 1,807 1,952 2,108 2,276 2,458 2,655 2,868 3,097 3,345

$M 14 29 47 68 92 120 151 186 226 271 293 316 342 369 398 430 465 502 542 585

000 TEUs 100 105 110 116 122 128 134 141 148 155 163 171 180 189 198 208 218 229 241 253

$M 2 4 6 8 11 13 16 20 23 27 29 30 31 33 35 36 38 40 42 44

$M 15 15 15 15 15 15 15 15 15 15

$M 5 5 5 5 5 5 5 5 5 5

$M 40 40 40 40 40 40 40 40 40 40

$M 68 207 357 520 696 887 1,092 1,314 1,553 1,811 1,953 2,039 2,129 2,224 2,324 2,429 2,539 2,655 2,776 2,904 Discount rate NPV

1.000 1.030 1.061 1.093 1.126 1.159 1.194 1.230 1.267 1.305 1.344 1.384 1.426 1.469 1.513 1.558 1.605 1.653 1.702 1.754

$M 68.0125 213 379 568 784 1,028 1,304 1,616 1,967 2,362 2,624 2,822 3,036 3,267 3,515 3,784 4,074 4,388 4,727 5,093 30% 2,458

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12.4

Conclusions

The financial analysis allows for A capital expenditure of $600 million for adjustments to the pallet pool, packaging & ancillary equipment over the 10 years The incremental increase in operating costs by $100 million over the same period The benefits of ECR/EUL are applied to 75% of the market segment for consumer grocery and non grocery products and 50% for industrial products Unitised loading of containers is a substantial benefit The analysis yields a positive NPV of $2.5 billion, assuming an inflation rate of 3% and a discount rate of 30% (pre-tax). This NPV increases to over $5.1 billion of the discount rate is decreased to 20%. Prime-facie, there appears to be a substantial cost impact if the current standard is maintained, leading to non conformance costs arising from the “disconnect” between standards.

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13. APPENDICES
Table 13-1 Scenarios "A" - "C" indicating growth in indices in the intervening years Error! Not a valid link.

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Table 13-2 Value of market segments and determination of task size by segment
Product value per tonne

Segment

Product group

Value Totals $B Value $B 43 7 4 15 15 17 18 8 5 8 7 7 10% 7% 54

Tonnes (Million)

Pallet issues (Million)

Consumer Grocery

Consumer Non-Grocery

Industrial

Processed food + agricultural products Non processed agric. products "Other" products Department/variety store Hardware + furnishings Pharmacy Wood and paper manufacturing Fabricated metal product manufacturing Photographic and scientific equip mfg. Electronic equipment Electrical equipment and appliance mfg. Miscellaneous mfg.

2000

27

45

47 9% 7%

3000

16

26

53 2% 5%

4000 1

13 56

22 93

Not included

Fuel chemicals Other machinery incl. Transport Mineral products Printing and Publishing Metal

34 30 10 16 38

128 128.05

Totals from above Check total Manufacturing, export, imports Agricultural products 258 24 282

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Figure 13-1 Australian manufacturing - production, exports, imports and consumption by market sector

$B Value
60.0
49.9

Movements and comparison between the Australian manufacturing base and the total market ($B)
56.1 45.6 41.2 35.7 32.2 18.4 16.3 16.8 18.3 21.8 42.0 10.4 11.5 13.9

50.0 40.0 30.0

13.2

12.7

12.2

13.7

20.0 10.0 -

0.5 2.0

Food, beverage and tobacco mfg.

Textile, clothing, footwear and leather mfg.

Wood and Prinitng, Petroleum, paper product publishing and coal, chemical mfg. recorded media and associated product mfg

Non-metallic mineral products mfg.

0.3 1.4

Metal products Machinery and mfg. equipment

Market Segment Sales incl. Exports $B Exports $B Imports $B Total Aust. Market $B

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6.4 0.8 3.1 8.7 Other mfg.

8.4

6.9

4.5

1.4 3.5

2.6

6.9

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Table 13-3 Forward projections of production, export, import and consumption estimates based on derived growth indices, by market sector
Product, consumption and trade values for containerised products Comsumer (Food/grocery) Dom. Production Export Import Dom. Consumption Current Growth (a) 11.6% 9.2% 2.6% Modelled Growth (b) 4.2% 10.0% 9.0% 2.6% 2001 2002 2003 2004 2005 2006 2007 2008 2009 61 10 3 54 63 11 3 55 66 12 4 57 68 14 4 58 70 15 5 60 73 17 5 61 76 18 5 63 79 20 6 65 82 22 6 66 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 85 24 7 68 89 27 8 70 93 29 8 72 97 32 9 73 101 36 10 75 106 39 11 77 111 43 12 79 116 47 13 81 122 52 14 84 128 57 15 86

Product, consumption and trade values for containerised products Consumer (Household) Dom. Production Export Import Dom. Consumption

Current Growth 13.5% 14.2% 4.6%

Modelled Growth 4.3% 9.0% 7.0% 4.6%

2001 2002 2003 2004 2005 2006 2007 2008 2009 39 4 12 47 40 4 13 49 42 4 14 51 44 5 15 54 46 5 16 56 48 6 17 59 50 6 18 62 52 7 19 64 54 7 21 67

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 56 8 22 70 59 9 24 74 61 10 25 77 64 10 27 81 67 11 29 84 70 12 31 88 73 13 33 92 76 15 35 97 79 16 38 101 82 17 41 106

Product, consumption and trade values for containerised products Industrial/Other Dom. Production Export Import Dom. Consumption

Current Growth 5.5% 8.4% 3.3%

Modelled Growth 0.9% 4.0% 5.0% 3.3%

2001 2002 2003 2004 2005 2006 2007 2008 2009 29 8 32 53 29 8 34 55 30 9 35 57 30 9 37 58 31 9 39 60 31 10 41 62 32 10 43 64 32 11 45 67 32 11 47 69

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 33 11 50 71 33 12 52 73 33 12 55 76 34 13 57 78 34 13 60 81 34 14 63 83 34 14 67 86 34 15 70 89 34 16 73 92 34 16 77 95

Product, consumption and trade values for containerised products Total Dom. Production Export Import Dom. Consumption

Current Growth

Modelled Growth 3.7% 8.2% 5.9% 3.5%

2001 2002 2003 2004 2005 2006 2007 2008 2009 129 22 47 154 133 24 50 159 138 26 53 165 142 27 56 171 147 30 59 176 152 32 63 183 157 35 66 189 163 37 70 196 169 40 74 202

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 175 44 79 209 181 47 83 217 187 51 88 224 194 56 93 232 202 60 99 241 209 65 105 249 218 71 111 258 226 77 118 267 235 84 125 277 245 91 133 286

Ratio international trade to consumption Comsumer (Food/grocery) Consumer (Household) Industrial/Other Total

25% 33% 75% 45%

27% 34% 77% 46%

29% 35% 78% 48%

31% 36% 79% 49%

33% 37% 80% 50%

35% 38% 81% 52%

37% 39% 82% 53%

40% 40% 84% 55%

43% 42% 85% 57%

46% 43% 86% 58%

49% 44% 87% 60%

53% 45% 89% 62%

56% 46% 90% 64%

60% 48% 91% 66%

64% 49% 92% 68%

69% 50% 94% 71%

74% 52% 95% 73%

79% 53% 97% 75%

84% 55% 98% 78%

(a) Based on ABS Economic indicators against market values (b) Composite forecasts derived from ABS Economic indictaors and adjusted to reflect volume growth in contaier 1995-2000

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Table 13-4 Summary of Import Containers by Origin port for 1995 and 2000 Error! Not a valid link.

Source: Analysis of data provided by TradeData (Victoria University)

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Table 13-5 Summary of Export Containers by Destination port for 1995 and 2000 Error! Not a valid link.

Source: Analysis of data provided by TradeData (Victoria University)

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14. PUBLICATIONS AND RELATED ARTICLES

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Domestic and International pallet standards Operational and cost implications ECR Asia Council Amidst the Asia economic crisis, ECR has now been established in Australia, Hong Kong, Philippines, Taiwan, Thailand, Singapore, Malaysia, Korea, India, Indonesia and China. An Asian Joint Industry Committee known as ECR Asia Council has been formed in July 1999 to facilitate the adoption of ECR or Supply Chain Management (SCM) practices in a consistent fashion across Asia, and to initiate those activities where local ECR or SCM boards do not exist currently. The Committee is made up of members from regional suppliers, retailers, manufacturers and representatives from ECR organisations in Asia. ECR Singapore ECR Singapore was officially launched on 11 Aug 1998. The ECR Board is jointly chaired by Mr Tan Kian Chew, Chief Executive Officer of NTUC Fairprice Co-operative Ltd and Mr Yap Yoon Kee, General Manager of Colgate-Palmolive (Eastern) Ltd, with the Singapore Article Number Council (SANC), a division of the Singapore Confederation of Industries, providing the secretariat support. This industry-led initiative has the following objectives: To improve consumer choice, satisfaction and service To achieve a reduction of total costs, inventories and physical assets To remove unnecessary cost from the distribution system and make it more responsive to consumer demand To network with other national and regional ECR organisations ECR Singapore focuses on three areas for continuous improvement

14.1

ECR Standard Pallet Implementation Project

INTRODUCTION In today's competitive environment, the grocery industry is under intense pressure to provide consumers with better choice through the anticipation of their needs and at the same time, the elimination of unnecessary distribution and inventory management costs. The Efficient Consumer Response (ECR) movement began in the United States in 1993 in response to the recession to fulfill consumer wishes better, faster and at less cost. WHAT IS ECR? Efficient Consumer Response (ECR) is a strategy to improve consumer choice, satisfaction and service and at the same time, reduce total costs, inventories and physical assets. ECR requires distributors and suppliers to focus jointly on the efficiency of the total grocery chain, rather than the efficiency of individual components. It successfully stimulated consumers' expenditure and pulled the retail sector of the US and Europe out of recession in the 1990's. Such an industry-led initiative is critical and timely given the current Asian financial crisis. The success of this initiative is dependent upon the commitment by all parties in the supply chain to agree on standards and work together in a mutually beneficial arrangement. ECR benefits companies in terms of the reduction in supply chain and inventory costs, and the increase in sales through better response to customers' needs.

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Domestic and International pallet standards Operational and cost implications The Pallet Standardisation Working Group The working group on "Pallet Standardisation", co-chaired by the Singapore Productivity and Standards Board (PSB) and NTUC Fairprice, is the largest working group that looks into the reduction of supply chain and increase in productivity through standardisation of pallet sizes. Its implementation will result in labour reduction and minimal handling of goods. Standardisation of pallet sizes will in turn allow standardisation of trucks, containers and warehouse design for economy of space. Subgroups of manufacturers, distributors, equipment suppliers and thirdparty logistics providers have also been formed to address issues of concern and the necessary industry adjustment required for the implementation of standard pallet size(s) in their sectors. PALLET SIZE STANDARDISATION The Pallet Standardisation Working Group looked into the reduction of supply chain costs and increase in productivity through standardisation of pallet sizes. Issues of concern and the necessary industry adjustments required for the implementation of standard pallet size(s) in their sectors were addressed by the working group during the third and fourth quarters of 1998. Surveys have been conducted among the working group members to assess the current use of pallets and the impact of pallet size standardisation to the fast-moving consumer goods (FMCG) industry. The working group is made up of 35 members with 5 retailers, 15 grocery and FMCG manufacturers, 2 distributors, 3 third-party logistics providers and 7 logistics equipment suppliers.

Supply management covers a number of initiatives designed to improve the flow of products through the supply chain. Working groups were formed for the following areas: Continuous Replenishment Products with Short Shelf-Life Pallet Standardisation Roll Cage (new working group formed in July 2000) Demand management focuses on improving the assortment of products offered to consumers, effectiveness of product promotion, new product introduction and the efficiency of related demand management activities. The working group under this area is Category Management. Category Management looks into efficient assortment, promotion and product introduction. It is a method for managing complex changes that are occurring in consumer needs and shopping behaviour. Enabling technologies are improvements that render support to supply and demand management. This includes rapid communication of accurate and complete information to all trading partners, through technologies such as Electronic Data Interchange (EDI). Computerisation, including the application of automatic identification and data capture techniques, will in turn lead to the standardisation of design and specifications for trucks, containers and warehouses. Working groups were formed for the following areas: Data Alignment EDI Standards Bar-coding Standards & Point-of-Sales Education & Training

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Benefits of Pallet Size Standard Currently, there are 16 different pallet sizes in use in the market. Standardisation of pallets provides the platform for pallet exchange. In the ideal scenario, goods can be transported from the manufacturer, through the distributor, to the retail store on the same pallet. By eliminating the need for manual transfer of goods to another pallet, productivity and work efficiency are improved. The reduction in both labour and handling of goods will reduce delivery and transfer costs. Standardisation of pallet sizes will in turn allow standardisation of palletisers, racking and warehouse design. This will result in economy of space and facilitate automation. Other benefits identified through the survey were: Reduction of damaged goods losses through minimal manual handling Reduction in number of transportation trips Minimisation of the wastage of pallets Elimination of the need for sorting of pallets Reduction of unloading time for suppliers Reduction in warehouse storage cost Recommended Pallet Size The 4-way 1000mm x 1200mm pallet is recommended by the Pallet Standardisation Working Group as the standard for the grocery and fast-moving consumer goods industry in Singapore. The standard pallet shall have a safe working load of minimum one tonne.

Fig 1 : Dimensions of the ECR Standard Why 1000mm x 1200mm pallet? Compatible with standard ocean going containers and the majority of trucks Dominant size used in Asia (China, Thailand, Malaysia, Indonesia, Philippines and Singapore) Endorsed by ECR Asia Conform to International Standard - ISO 6780 'General-purpose flat pallets for through transit of goods - Principal dimensions and tolerances' Conform to Singapore Standard - SS 334 'Specification for Timber Pallets' Major retailers in Singapore have already adopted this standard Sufficiently wide for drive in racking IMPLEMENTATION

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Domestic and International pallet standards Operational and cost implications The objectives of the ECR Standard Pallet Implementation Project are defined as follows: To implement ECR Standard Pallet. To evaluate the benefits of the pilot ECR Standard Pallet Implementation Project. To publicize the results of the pilot so as to encourage more companies to adopt the usage of the ECR Standard pallet rental to secure maximum benefits. The length of this project is 12 months, starting from 3 January to 31 December 2000. The 4 participating companies in this project are YHS (Singapore) Pte Ltd (YHS), Unilever Singapore Pte Ltd (Unilever), Grocery Logistics Singapore Pte Ltd (GLS), the logistics arm of NTUC Fairprice Co-operative Ltd, which is the largest supermarket group with 78 branches and annual turnover amounting to S$917.6 million in 1998/99 and LHT Holdings Ltd (LHT). Though, a number of large companies in Singapore have implemented the use of the recommended pallet standard, there is a need to both accelerate the pace of and widen the implementation of the standard pallet in the FMCG industry to realise the benefits of interoperability as soon as possible and transform the industry. The take up pace of the standard pallet is slow and the replacement rate cited by the working group members has ranged from 2 to 10 years. At present, there is no local data on the benefits of the implementation of using standard pallets. Hesitancy amongst the various players in the FMCG supply chain creates doubts about actual operational benefits that translate into real cost savings gained from using standard pallets. This issue of achieving interoperability within the FMCG supply chain in

During the initial stages, ECR Singapore has encountered the following problems in the implementation of this pallet standard in the FMCG industry: Though a number of the Working Group members went ahead to implement the pallet standard, some expressed the need to see some real benefits of pallet standardisation before adopting such standard. There is a great deal of different pallet sizes currently being used by the FMCG industry. There is a high replacement cost. To implement the recommended Pallet Standard, some members of the FMCG industry needed to change the sizes of the pallet racks. The changing of the size of the racks would involve the re-surfacing of the warehouse flooring, as most racks would be cemented to the floor. To implement the ECR Pallet Standard in the manufacturing sector, the automated palletising equipment would in most cases need to be modified to accept a different size pallet and there would also be a need to adjust the speed and the conveyor belt configurations. Some of the forklifts currently being used in the FMCG industry are designed for a particular size pallet. New forklift blades would need to be acquired in these cases to handle the recommended 4-way ECR Standard Pallet. In order to show the benefits of the implementation of the pallet standard despite the above-mentioned problems, a pilot project, ECR Standard Pallet Implementation Project was initiated to demonstrate to the fast-moving consumer goods (FMCG) industry that productivity and cost savings can be achieved through standardisation.

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Domestic and International pallet standards Operational and cost implications conducted during 6 November - 30 December 2000 (another duration of 8 weeks). Thereafter, a complete report with findings and analysis will be compiled at the end of the project in January / February 2001. The number of ECR Standard Pallets used in the respective companies as of October 2000 is as follows: GLS: 11,549 YHS: 16,045 Unilever: 800 Some preliminary findings from the first measurement are as follows: Reduces time for sorting pallets Reduces time for loading and unloading goods Reduces multiple handling Reduces product damages due to multiple handling Reduces number of vehicle trips Reduces number of pallets needed Reduction in manpower needed Reduction in number of lost pallets Facilitates the concept of shared assets From these initial findings, the pallet standardisation project has an internal rate of return of 399%. This translates to a return of 4 times the money invested in the project, where a significant portion of the benefit came from increased productivity of labour and reduced cost of ownership. This figure will be re-confirmed in the final stage of the project in December 2000.

Singapore by using a common platform cannot be realised and shown until a pilot study of the actual operational benefits is carried out. A Project Steering Committee was formed to ensure this project achieves its objectives and completes according to schedule. This steering committee will also institute various measurements to gauge the benefits in the implementation of ECR Standard Pallet. To ensure objectivity of the measurement, Singapore Polytechnic would act as an independent body in performing data collection and measurement. PricewaterhouseCoopers played the role of an advisor in this project. Findings of Project To ensure that the benefits are appropriately captured, an external third party was engaged to measure the productivity gains. The benefits were captured through the use of questionnaire, interviewing a list appropriate representatives from the participating companies and proper verification of data that were being collected. Each participating company adopted the usage of ECR Standard Pallet for their operations under a pallet-pooling scheme since January 2000. Singapore Polytechnic (SP) has conducted the first round of measurement during 8 May - 1 July 2000 on the benefits of this project through data collection and measurement. PriceWaterhouseCoopers (PWC) played the role of an advisor throughout this process. 4 students were attached to each participating company (YHS, Unilever, GLS and LHT) respectively for a period of 8 weeks during 8 May – 1 July 2000. The second round of measurement will be

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Domestic and International pallet standards Operational and cost implications Although the ECR Standard Pallet implementation project has not been completed, the preliminary findings (after nine months since commencement in January 2000) have been encouraging. Upon the completion of the project (scheduled in December 2000), the detailed findings on the operational benefits that has been derived through the use of standard pallets, pallet pooling and leasing of pallets would be shared with the industry (and in particular the FMCG players). This would be done through ECR Singapore.

Conclusion The advantages of ECR Standard Pallet include: Reducing multiple handling of goods Facilitating delivery turnaround time Facilitating regional transport efficiencies Streamlining transport services Facilitating the concept of shared asset Facilitating the use of single material handling systems Facilitating palletised deliveries Streamlining packaging design process The envisaged benefits for implementing ECR Standard Pallets through the pilot are as follows: Standardisation: Driven by the need to simplify business processes Simplification: Removes unnecessary business practices and create greater efficiency and effectiveness Efficiency: Result in cost savings Enhanced business values: Increase in productivity and better service for consumers 4-way Pallet: Entry points on all four sides enable loading being done on any side Fitting: Optimum space utilisation in warehouses as well as for most lorries and sea freight containers Racking: To standardise on 1200mm and 1000mm to save space for warehousing Deliveries: To facilitate efficient palletised deliveries Pallet Pooling: Reduces number of pallets used in the supply chain Streamlining: Streamlining of warehouses and distribution systems

Fig 2 : ECR Standard Pallets in use at Unilever’s warehouse

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Fig 3 : ECR Standard Pallets in use at YHS’s warehouse

Fig 5 : Palletised goods loaded onto trucks for delivery

Fig 4 : Picking & loading of goods onto ECR Standard Pallets at GLS’s warehouse

Fig 6 : Stacks of new ECR Standard Pallets

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Prepared by: Ms Jaslin Lau Wai Ling ECR Project Manager Singapore Article Number Council

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Domestic and International pallet standards Operational and cost implications often reassembled more than 10 times, at different stages in the supply chain. ‘The challenge is to break the half chain view, where each participant focuses on his part rather than on a total optimum’ L. Henner Klein, A.T. Kearney, Geneva 1996. The problem is compounded by a wide variety of unit load dimensions across Europe. There are too many standards and they differ from country to country. Established international standards are not always used and a widely applied, consistent set of European standards is required to achieve EUL harmonisation. This should be based on the modularity principle as this dramatically improves space utilisation. Within the European grocery industry the 600 x 400mm master module is widely accepted and is recommended in this Report as the basis for unit load dimensions. To achieve c=breakthrough results, all variable constraints must be challenged, although fixed or genuine constraints are recognised. Unit load harmonisation is key to supply chain integration and breakthrough results. A wide range of secondary unit load dimensions is currentl;y in use, driven by primary product size. This proliferation adds complexity and should be rationalised. Since space utilisation is key to EUL, available spaces across the supply chain should be based on seven modules: five based on strict modularity with the 600 x 400 and two additional modules, representing shelf replenishment needs. Secondary reusable transport items (RTI), such as boxes and crates, offer significant potential savings for selected category flows. In order to limit

14.2

Efficient Unit Loads by A.T. Kearney

Efficient Unit Loads are absolutely key in improving transport, storage and handling efficiency across the total supply chain. Unit loads play a key role across the supply chain, grouping primary and transport products to facilitate transport and handling. Used by manufacturers, retailers and service providers, unit loads are key cost drivers. They impact on transport, storage, handling and packaging, which together, represent 12-15% of retail sales price. Developing more Efficient Unit Loads is critical to the success of ECR and is estimated to save 1.2% of retail sales price. Efficient Unit Loads impact 12-15% of retail sales price. Savings opportunities represents 1.2% of retail sales price The Efficient Unit Loads (EUL) project is one of three ECR Europe supply side projects, whose ultimate objective is supply chain integration. This can only be achieve by harmonising physical aspects of the supply chain. EUL Mission: To improve the efficiency and effectiveness of current and future supply chains by promoting harmonisation and integration of transport and storage items. The traditional approach to supply chain management has been for each player to optimise his part, often to the detriment of ‘total chain’ efficiency. Thus, manufacturers have typically used pallets to optimise space ut8ilisation and retailers have improved handling productivity by using roll cages. This disjointed approach has resulted in unnecessary, non-value added handling, where loads are

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Domestic and International pallet standards Operational and cost implications EUL projected savings of 1.2% of retail sales price are not evenly spread among manufacturers and retailers. Retailers expect to gain three quarters of the savings, mainly through more efficient assortment creation and shelf replenishment. However retailers’ operational gains are likely to be manufacturers’ investment needs. For example, switching to RTI to achieve more efficient retail shelf operations will require manufacturers to invest in the production line. EUL opportunities are not equally spread between manufacturers and retailers. Future pricing must incorporate a suitable compensation mechanism to ensure that such investment takes place. A clear vision, leadership and a long-term perspective are required to ensure that projected ECR savings become a reality. Efficient Unit Load developments require a process and category oriented approach. In order to make best use of spaces available in the supply chain and to minimise the overall handling along the chain, the unit load design must be very process-oriented, together with the principal replenishment flow modules, allowing category-specific increases in cross docking and break bulk operations. EUL make optimal use of spaces available in the supply chain and minimise handling. This Report provides guidelines rather than standards. It should be used by standards bodies, and by manufacturers, retailers and service

burgeoning proliferation and complexity, the EUL team recommends establishing RTI council to develop European standards. Tertiary items are critical to the success of ECR. More than 30 different pallet sizes and types are in use across Europe. These should be rationalised to four recommended plan dimensions. Current pallet heights make poor use of vehicle inner heights, often based on previous design. As a result, 15% of additional grocery trucks are required. As vehicle technology develops and extra inner truck height is made available, pallet height standards need to be increased. High cube and double stacking technologies should also be monitored and pallet heights adapted to reflect developments. Pallet height should be derived from inner truck height. The current situation, in which manufacturers typically use pallets and retailers favour roll cages, is a barrier to Efficient Replenishment. Ass cross-docked volume increases, the need for an integrated tertiary item – used across the total supply chain – becomes critical. Suppliers of tertiary items need to develop a tertiary item which combines the advantages of pallets with those of roll cages to enable effective cross-docking. The Dolly is one such item but is only suitable for those applications using RTI. Technical developments are required to integrate pallets and roll cages.

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providers, working together to design and operate Efficient Unit Loads supply chains. This will ‘fulfil consumer wishes better, faster and at less cost’.

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the grocery supply chain from a "push system" to a "pull system" - where trading partners form new alliance relationships and the replenishment of store products is initiated by the point of sale (PoS) data. The concept on which ECR is based actually originated from the quick response (QR) strategy, already existing in the textile and apparel industries (Cooke, 1994; Fiorito et al., 1995). QR, in turn, is based on the manufacturing just-in-time (JIT) concept (Ellram et al., 1989; Fiorito et al., 1995; Knill, 1990). The JIT concept was simple: to deliver raw material to production areas in the exact required amount at the precise time it was needed. The use of raw material pulls new raw material into the production process. During the mid-1980s the JIT manufacturing concept was applied to the US textile and apparel industries in an attempt to combat market penetration by overseas manufacturers. This textile and apparel industries initiative was termed "quick response" and attempted to reduce the amount of inventory held within the apparel supply chain. Quick response required the retailer to share point-of-sale-scanned data with manufacturers to improve the flow of product through the supply chain. The grocery industry noted the success of the quick response approach to managing supply chain data and proposed a similar stock replenishment system called ECR (Cooke, 1994; Ellram et al., 1989; Fiorito et al., 1995). Although ECR originated in the USA, the concept has attracted many European countries and Australia. Research papers published in the last few years suggest that there has been an increasing level of interest among European manufacturers and retailers in the ECR initiative (Coopers & Lybrand, 1997; Coupe, 1995; Kurnia et al., 1998; Leggett, 1996; Peck, 1997; Wheatley, 1996). The importance and applicability of ECR to the European grocery industry became more noticeable in 1994 with the establishment of the ECR Europe Executive Board, which promotes and advances the ECR initiative in Europe (Davies, 1997; Penman, 1997). In Australia, however, very little research has been conducted regarding the applicability of the ECR initiative. At the beginning of this study, only one industry study (conducted by Coopers & Lybrand in 1995) could be found, the results of which indicated that ECR would be effective in improving the state of the Australian grocery industry.

14.3

Efficient consumer response (ECR): a survey of the Australian grocery industry

John K. Harris, Paula M.C. Swatman, Sherah Kurnia
The Authors John K. Harris, John K. Harris is an Analyst at Deakin University, Geelong, Victoria, Australia Paula M.C. Swatman, Paula M.C. Swatman is the Director of the Interactive Information Institute, RMIT University, Melbourne, Australia Sherah Kurnia, Sherah Kurnia is a PhD candidate at the School of Information Management and Systems, Monash University, Australia Abstract Efficient consumer response (ECR) is a supply chain management strategy which attempts to address the inefficiencies that have led to excessive inventory and unnecessary costs at all levels within the grocery industry supply chain. Although originating in the USA, ECR has also attracted attention and interest in many other countries. This paper presents the results of an Australian study which was designed to assess the applicability of ECR within the Australian grocery industry. The results of the study indicate that the inefficient business practices of the US supply chain are also prevalent within the Australian grocery industry and that some Australian companies had already begun to engage in business activities related to ECR as early as 1996.

Introduction
Efficient consumer response (ECR) originated in the USA in 1992 as a direct result of threats from alternative store "formats" (or types) and their supply chains (McKinsey & Co. 1992) which highlighted major inefficiencies within the supermarket and its supply chain (Kurt Salmon Associates, 1993). In order to survive, the US grocery industry leaders took an initiative to study how to improve the performance of the supermarket supply chains in 1992. As a result of their study, the ECR initiative was established, and the term "efficient consumer response" (ECR) was first introduced at the US Food Marketing Institute Conference in January 1993 (Robins, 1994). This ECR initiative is concerned with transforming

ECR as a collaborative solution to adversarial trading

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The use of paper-based coupons as a consumer promotion technique can be replaced with electronic coupons, frequent shopper systems, every day low price (EDLP) policies and other efficient incentive programmes. Thus, the efficient promotion initiative endeavours to remove excessive costs by reengineering promotion practices, and is also supported by the "category management" strategy (Kurnia et al., 1998; Pramataris et al., 1997). (c) Efficient product introduction The objective of the new product introduction initiative is to maximise the effectiveness of new product development and introduction activities in order to reduce costs and failure rates in introducing new products (Kurt Salmon Associates, 1993). This is achieved by the involvement of wholesalers/distributors, retailers and consumers at an early stage of the new product development process. Manufacturers, distributors and retailers must work together as allies to reduce the costs of product development and to produce only products anticipated and demanded by the consumer marketplace (Tripplet, 1994). Once again, the "category management" strategy plays a crucial role in achieving this initiative, because of its contribution to an understanding of successful existing products (Kurnia et al., 1998; Pramataris et al., 1997). (d) Efficient product replenishment The efficient product replenishment initiative is the fundamental platform which supports the overall ECR strategy and it represents more than half the total savings projected from ECR implementation within the US grocery industry (Kurt Salmon Associates, 1993). The objective of this initiative is to optimise time and cost in the replenishment system by the provision of the right product to the right place at the right time in the right quantity and in the most efficient manner possible. In order to remove inefficiencies in product replenishment (for example, high inventory levels and carrying costs and sporadic manufacturing schedules), a "continuous replenishment program (CRP)" approach is required (Kurnia et al., 1998; Pramataris et al., 1997). ECR business activities To achieve these four efficiencies, ECR requires the following major business activities or initiatives (De Roulet, 1993): category management; continuous replenishment programme (CRP); computer assisted ordering (CAO); flow-through distribution (cross-docking); integrated electronic data interchange (EDI);

ECR calls for the creation of a timely, accurate and paperless flow of information relying heavily on electronic data interchange (EDI) and strategic alliances between supply chain members (Fiorito et al., 1995; Sansolo, 1993). The goal of ECR is to take out of the supply chain costs which do not add consumer value (Robins, 1994). ECR is about producing efficiencies in the grocery supply chain within the four core business process areas of efficient store assortment, efficient replenishment, efficient promotions and efficient product introductions (Kurt Salmon Associates, 1993).

ECR Initiatives
(a) Efficient store assortment The objective of this initiative is to optimise the productivity of inventory and shelf management at the consumer interface - the store level. Optimal allocation of goods on supermarket shelves (known as "store assortment") maximises consumer satisfaction by providing the best products and services while, at the same time, ensuring the most efficient use of available space to increase manufacturer, distributor and retailer profitability. The relationship between manufacturers, distributors and retailers is crucial in achieving efficient store assortment (Kurt Salmon Associates, 1993; Wood, 1996). To streamline business practices in the area of store assortment, manufacturers, distributors and retailers need to adopt a "category management" strategy (Kurnia et al., 1998; Pramataris et al., 1997). (b) Efficient promotion The efficient promotion initiative aims at maximising the total system efficiency of trade and consumer promotions. Efficient promotion attempts to eliminate inefficient trade promotions (forward buying and diverting) by introducing better alternative trade promotions such as "pay for performance" and "forward commit": pay for performance is concerned with rewarding retailers on the basis of how many products they sell to consumers, rather than how many products they buy from manufacturers (Washburn, 1995); forward commit relates to spreading the actual shipment of one order over several physical deliveries. This allows retailers to take the pricing benefits offered by manufacturers at a particular period in time (just as in the case of forward buying), without having to carry the inventory. In essence, this technique operates on "virtual inventory" which will be transformed into "real inventory" when required (Martin, 1994).

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(Garry, 1994c). Traditionally, stores have based their orders on the re-order clerk manually inspecting the store shelves and scanning the shelf-tag barcodes for those items with limited stock on the shelf (Anderson, 1996). The re-order amount entered by the clerk is based on the actual shelf amount and the ideal shelf quantity. The re-order clerk is not in a position to take into account PoS data, inventory which has already been scheduled for delivery, or likely future trends based on forecasting. Integrated CAO systems are designed to minimise (and even eliminate) these problems. (d) Flow-through distribution (cross-docking) According to Garry (1994a) the purpose of flow-through distribution is to hasten the flow of products from the supplier to the retail store by reducing storage and handling of products at the distribution centre or warehouse. It involves the breaking down of pallets at the distribution centre, reassembling them for store delivery and then shipping them to the retail store without ever storing the product in the warehouse. This requires significant investment in technologies such as EDI, barcoding and scanning of pallets and cases; and warehouse design changes such as lower ceilings and less racking. The key EDI transaction required for cross-docking is the Advanced Shipping Notice (ASN), to inform the distributor of the merchandise that is about to arrive. The automation of the warehouse inventory management system using barcodes means that inaccuracies can be eliminated. (e) Integrated electronic data interchange (EDI) EDI is the computer-application to computer-application communication of structured, formatted messages based on international standards, using electronic transmission media with no manual intervention (Brawn, 1989; Swatman, 1993). EDI is a technology which allows structured information to be shared among organisations in the supply chain resulting in significant reductions in transaction costs and enabling the organisations to adopt new and more effective and efficient business strategies (Emmelhainz, 1990; Gilmour, 1993; Klima, 1993; Spence, 1994), such as ECR. EDI is viewed as the essential effective enabler of the ECR management strategy because it focuses on achieving integration across organisational functions and between organisations (Swatman, 1993) in the grocery supply chain. (f) Activity-based costing (ABC) Activity-based costing provides the cost and operating information necessary to support innovative management improvement initiatives such as ECR. The focus of ABC is on accurate information about the true cost of products, services, processes, activities, distribution channels, customer segments, contracts and projects (Miller, 1996). ABC

activity-based costing (ABC). (a) Category management The term category management first appeared in 1987 (Smith, 1993) when certain organisations, such as Procter & Gamble (Mathews, 1995), began moving from "brand" management to management "by category". Category management has evolved to mean a process that involves managing product categories as business units and customising them on a store-by-store basis to satisfy consumer demands (Gnau et al., 1992). A category is a group of products having a common consumer end use (Hofler, 1996) and includes such things as household cleaners, dairy and frozen foods, paper products, health and beauty care products, soft drinks, etc. Category management allows the category manager to operate a category like a business so as to identify optimal product mix; and to stock each store with specific products that demographic and point-of-sale (PoS) information indicates customers wish to purchase. Category management is supported by EDI and barcode applications (Kurnia et al., 1998). (b) Continuous replenishment programme (CRP) Continuous replenishment, usually managed by the manufacturer, is a programme used to control and monitor the movement of goods from the manufacturer to the warehouse/ distributor (Garry, 1994c). CRP involves the manufacturer (rather than the retailer's warehouse) taking responsibility for replenishing the warehouse inventory, with the buyer supplying actual warehouse inventory withdrawal data and data on "stock-keeping units" (individual line items) to the manufacturer (Cross, 1993). CRP programmes reduce costs in distributors' inventory, but can increase some costs, such as transportation costs, if the manufacturer ships smaller truck loads more frequently (Garry, 1994b). Successful CRP implementation is dependent on effective trade relations, requiring shared business practices and information systems which rely heavily on EDI. (c) Computer-assisted ordering (CAO) Computer-assisted ordering, also known as "computer-aided ordering" (Fensholt, 1992; Garry, 1992; Thayer, 1991; Weinstein, 1995), covers the second half of the overall inventory supply chain - the movement of goods from the warehouse/distribution centre to the retail store. The aim of CAO is to generate store replenishment orders automatically, with minimal management intervention, based on such things as current and historical PoS scan data, delivery data and sales forecasts. The benefits of CAO have been identified as labour savings and dependability, warehouse and shipping improvements, and inventory reduction

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identify those organisations that are aware of the ECR strategy to discover whether their organisation (and the supply chain as a whole) can benefit from the ECR strategy; determine the reasons for adopting ECR by those organisations which have decided to pursue such a strategy. Inefficient business practices Figure 1 shows that "diverting" is little used within the Australian grocery industry, as just 17 per cent of survey respondents indicated that they use some form of diverting, and only 2 per cent stated that they used this practice the majority of the time. Deal selling/buying which results in forward buying, however, is prevalent within Australia and, as a result, there are likely to be excessive inventory holdings throughout the Australian grocery supply chain. Despite the greater than optimal inventory holdings, these figures suggest that inefficient promotional activities are used to a much lesser extent than in the USA and are therefore far less important as a motivator for ECR in this country.

supplies information about profits (where the money is being made) rather than about costs. Traditional accounting systems use gross margin calculations that spread operating costs across all products based on unit purchase price regardless of the actual value chain (Porter, 1985) through which the product passes. ABC focuses management's attention on controlling the source of costs, decisions that create activities, rather than squeezing budgets. Therefore ABC as part of ECR can increase the profitability of the supply chain by removing or reducing those cost activities that do not add value. This cannot be done with traditional systems because they do not reflect costs accurately (Weinstein, 1993). Australian ECR survey At the start of this research project, little US and almost no Australian research into ECR could be discovered. We identified three academic research projects on ECR or continuous replenishment (Clark, 1994; Hoban, 1993; Mathews, 1995) in the USA and in Australia we found only a single industry report undertaken for the Grocery Manufacturers of Australia by Coopers & Lybrand in 1995. We therefore decided to commence the overall research project (which involves a number of researchers and is expected to take several years) by investigating Australian attitudes to ECR and existing practices by members of the grocery industry in this country - an investigation which we believed was most appropriately addressed by means of a mail survey. Participants were chosen from organisations within the Australian grocery industry (members of the grocery supply chain). The questionnaire was posted to the most senior executive of 1,500 companies within the Australian grocery industry, whose mailing lists were obtained from grocery industry journals (Retail World Pty Ltd, 1995; White et al., 1995); and an effective response rate of 30 per cent, or 450 organisations, was obtained after two mailouts of the questionnaire. The survey was administered between June and October 1996. The research question under examination was "can Australian grocery industry supply chain members benefit from the efficient consumer response supply chain management strategy?" Industry supply chain members were surveyed to: determine the extent of inefficient business practices; identify the current use of business activities (supply chain initiatives) necessary for the adoption of the ECR strategy;

ECR business activities
Figure 2 illustrates the various ECR initiatives and shows that category management (59 per cent) and EDI (49 per cent) have the greatest number of respondents committed to their implementation, while cross-docking (19 per cent) and continuous replenishment (23 per cent) have the smallest number. Even though category management is more widely used than the other initiatives, only 10 per cent of respondents are committed to the implementation of this business activity as part of their ECR strategy (indicated as "Committed to Implementation (ECR)" in Figure 2), while the rest are using category management independently (indicated as "Committed to Implementation" in Figure 2). EDI (17.1 per cent) implementation as part of an ECR strategy has by far the greatest commitment in terms of ECR strategy, while activitybased costing (4 per cent) and cross-docking (5 per cent) have the lowest respondent commitment as part of their ECR strategy. These results suggest that, although Australian grocery industry members are actively engaged in a number of the ECR initiatives, they view each activity on its own merit - and have, thus far at least, shown little interest in integrating their improved supply chain management practices into an holistic ECR approach. ECR awareness Table I shows that just over two-thirds (61 per cent) of respondents were previously aware of the ECR strategy, while another third (34 per cent) were unaware of ECR before receiving this survey. Two-thirds of the group of "aware" organisations are

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store formats which were likely to have an adverse effect on the traditional grocery store, the supermarket. Given the findings of this review, we find it somewhat surprising that respondents to our survey did not indicate threats from alternative store formats as a main reason for adopting ECR, and that there is not a stronger commitment to implement the necessary ECR business activities/initiatives. One of the main reasons given for adopting ECR is pressure from trading partners (Table II). These results, which differ significantly from the (comparatively limited) evidence available from the USA, suggest that the Australian motive for engaging in ECR may well be quite different. Indeed, the likelihood is that Australian grocery industry members appear to be "encouraged" to engage in ECR by large and powerful customers (supermarkets) - a situation which is reminiscent of the Australian experience with EDI. There is thus a real danger that, as with EDI, organisations may become involved only to the extent required by their larger and more powerful trading partners, so that the full benefits of a strategic approach may be lost. The survey reported in this paper provides the first "hard" evidence of Australian ECR activities and attitudes. One thing which has become clear from the results is that, as with all surveys (which provide a "snapshot" of a respondent group at a point in time) we have made some fascinating discoveries, but opened up some even more intriguing possibilities which the data cannot answer satisfactorily. The next step is clearly to engage in case studies of Australian and overseas organisations involved in ECR to discover whether our suspicions about the motivations for ECR involvement are correct. This project is being undertaken by another member of the Monash Electronic Commerce Research Group and our serendipitous discovery that the member nations of the European Union have nominated ECR as a major area of interest for the next few years encourages us to hope for an enthusiastic response from prospective case study participants.

actively engaged in pursuing an ECR strategy and, in Table II, we have summarised the reasons why these respondents are actively pursuing this strategy. This list makes it clear that the "threat from alternative store formats" which motivates so many US supermarkets is of little importance to Australian grocery industry members. Figure 3 summarises respondents' views of the likely benefits of ECR to the Australian grocery industry and shows that the majority of those respondents who are aware of ECR believe the Australian grocery supply chain can gain significant benefit from ECR in terms of improved efficiency (76 per cent) and reduced costs (61 per cent); and that the respondent's own organisation can benefit (61 per cent) from pursuing an ECR strategy. Of the total group of respondents, 47 per cent believe that ECR will improve the efficiency of the grocery supply chain, while 37 per cent of all respondents believe that ECR will remove costs from the supply chain and also benefit their own organisation.

Discussion and conclusions
Our research into ECR within Australia provides very strong evidence in two areas: 1 that the inefficient business practices of deal selling/buying and forward buying (Figure 1), which push excessive inventory into the supply chain, exist within the Australian grocery industry although not necessarily to the same extent as in the USA. 2 That Australian organisations have begun implementing business activities and initiatives that are essential for the adoption of the ECR strategy. These results suggest that the Australian grocery industry is a "push system", like the USA, where inventory is continually pushed into the supply chain by supplier deals, which in turn lead to forward buying by customers. There is considerable interest in ECR in Australia, with 61 per cent of respondents being aware of ECR and 40 per cent of respondents actively pursuing an ECR strategy (Table I). Despite this interest in ECR, we believe that there is no real commitment to its implementation. This is borne out by the fact that while 40 per cent of respondents are actively pursuing an ECR strategy (Table I) only 17 per cent (EDI) and 4 per cent (ABC) respectively of respondents are actually committed to the implementation of the essential business activities (Figure 2) necessary for the successful implementation of ECR. A review of the Australian grocery industry (Commercial Economic Advisory Service of Australia, 1991) identified inefficiencies within the Australian grocery industry which ECR seeks to address. This review identified threats from alternative

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Figure 1 Inefficient business practices within the Australian grocery industry Table II Reasons for actively pursuing an ECR strategy

Figure 3 Opinions as to the likely benefits of ECR in Australia Figure 2 ECR-related business activities within the Australian grocery industry

Table I Respondents' ECR status

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