SUMMARIES

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

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

Report Managing International Supply Chains
Identifying best practice across borders

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Watford.igd. distributors. Letchmore Heath. At IGD we are passionate about this industry and work hard to bring people together to improve mutual understanding. Our main activities are: • Producing business reports. Analysing developments and forecasting trends in the • • • • food and grocery industry Running educational programmes. wholesalers.Who Are We? We aim to be the leading source of information. Herts WD25 8GD. research and education for the food and grocery industry. manufacturers and farmers. We develop practical ‘best practice guidelines’ that also benefit the consumer Providing free information. We conduct regular consumer research to understand the big issues that concern consumers Bringing people together.We are unique in that we are the only organisation in the world that has members from all parts of the food and grocery market. including retailers. Fact sheets and industry best practice guides are now available on-line free of charge and our information unit is there to provide answers to queries (the information unit service is only free of charge to members of IGD) For more information please visit our website: www. UK Tel: +44 (0) 1923 857 141 Fax: +44 (0) 1923 852 531 Email: igd@igd. We have no vested interests and we do not lobby. research and education for the food & grocery industry. We bring the whole industry together to address issues and examine strategies for the future. What Do We Do? We are a one-stop shop for information. From this unique position we are experts on the grocery supply chain and also have a good understanding of shoppers. caterers.com IGD Grange Lane. We run a variety of training courses and our conference programme is renowned throughout the industry Keeping close to the shopper.com © IGD 2006 .

No part of this publication may be reproduced. mechanical. electronic. neither IGD nor any of its staff shall be liable for errors or omissions however caused.Managing International Supply Chains January 2006 © All rights reserved. Registered Office: Letchmore Heath Watford WD25 8GD (01923) 857141 Whilst every effort has been made to ensure that the information contained in this publication is correct. a registered charity and company limited by guarantee registered in England no. ISBN 1-904231-99-3 © IGD 2006 www.com/supplychain . stored in a retrieval system or transmitted in any way or by any means. without the prior permission of the Institute of Grocery Distribution. photocopying.igd. recording or otherwise. 105680.

com/supplychain © IGD 2006 .www.igd.

1 Automation and Automated Distribution Centres Key Focus .2.2 What is Your Business? 1.Reckitt Benckiser France.3 How Important is Supply Chain in Your Company’s Strategy? 1.1.2 Technology in Supply Chain 2.Superquinn & Coca-Cola HBC (Ireland) 2.3.1.Carrefour.1 IGD’s International Survey 1.igd.3 Which Country Operation(s) Do You Represent? 1.Unilever. Shared-User Networks 2.4 How is Your Supply Chain Managed? Case Study .1. Supply Chain Optimisation 2.1 Centralised Distribution Hubs Key Focus . International Supply Chain Barometer 1. UK Case Study .2. France.1.2 The Supply Chain Overview 1.1 What Key Challenges are Facing Supply Chain in Your Area of Operation? Case Study .3 Consolidation and Shared-User Initiatives Case Study .Sale and Lease-Back 2.2.Automation in CVS/Pharmacy.4 Supply Chain Challenges 1.2 Which Functions or Departments are Part of Supply Chain? 1.Contents List of Tables List of Figures Key Findings and Executive Summary 1.Distribution Parks Case Study . ‘Pooling’ Case Study ./ © IGD 2006 www.1 Penetration of Outsourcing to Third Party Logistics Providers 1.2.. Managing International Supply Chains Case Study .Zara’s Vertical Supply Chain 1.1 Optimisation Through Warehousing 2.1 The Definition 1.Gruppo PAM and Number 1 Logistics Group.3 Outsourcing 1.. Italy Key Focus .Mattel. European Distribution 2.Automation in Tesco.1 IGD Research Methodology 1. USA i iii 1 13 14 15 16 17 18 18 20 21 23 25 27 31 31 35 35 37 45 47 47 47 48 50 50 50 51 52 54 55 55 57 57 contd.2.4.1.2 Warehouse 'Sale and Lease-Back' Schemes Key Focus .1.com/supplychain .

. RFID Roll-Out Key Focus .3 India – Retailing Opportunities 3.2.4 Inventory Challenges 3.3 Global Data Synchronisation (GDS) 2.3.Metro/Nestlé & SATO Germany.3.Metro Group Logistics Germany.1 Key Developments Case-Study . Inter-modal Hub Management Case-Study .Wal-Mart.igd. Using the Canal Network Key Focus . RFID 2. Use of Ports Key Focus .2 China – Retailing and Global Sourcing 3.4 4th Party Logistics Transport Management Case-Study .2.. China Case-Study .Contents (continued) 2.3 Legislation 3.3.7 Delhi versus Mumbai 3. FGP and Cross-Docking 2.3 Challenges for Global Sourcing Case-Study . China 3.3.5 National Brand Coverage 3.Auchan France. Supply Chain Optimisation (continued) 2.3.ASDA UK.Exel and Unilever UK Foods.3 Intermodality .3.com/supplychain © IGD 2006 .1 Managing International Differences Case-Study . International Sourcing 3.3./ www.3.3.2.2 Sales Field Force 3.2 Cross-Docking Case-Study .3.Wal-Mart.Carrefour. International Differences and Emerging Markets 3. Assimilating International Operations 3.2.1 Factory Gate Pricing 2.9 The Future 45 59 61 62 62 65 65 66 67 69 70 71 73 75 75 76 77 78 80 82 82 83 84 85 86 86 91 93 93 94 95 96 96 97 97 97 98 contd.1 Distributors 3.2 RFID/EPC Key Focus .2 Opportunities in Global Sourcing 3.Auchan Group.6 Infrastructure Challenges 3.3. Freight Management 3.A European Perspective Key Focus .Kursiu Linija 2. China Case-Study .Procter & Gamble.8 Supply Chain Improvements 3.2.SPaP Bratislava.3 Optimisation Through Transport 2.3.Wal-Mart US.3.

1 Which Retailer Do You Most Admire? 4.9.Carrefour Poland.Tesco.2 Which Manufacturer Do You Most Admire? 4.8.7 Enablers of Best Practice in Supply Chain 4.8 Continuous Improvement & Re-Engineering Approaches 4.4.2 Supply Chain Trends Case-Study .8. Central and Eastern Europe Case-Study .10.6.10.1 Formal and Informal Methods 4.1 Business Process Re-engineering (BPR) 4.4 Central & Eastern Europe – Supply Chain Restructuring 3.1 4.10.com/supplychain .10.10.1 Supply Chain Advantages 3. Best Practice Supply Chain Management 4.2 Total Quality Management (TQM) 4.10.7 Data Issues and IT Improvements 4.3 Lean Methodologies 4.4 4.5 Production.11 In Summary 77 99 99 100 101 103 105 107 109 111 112 113 114 116 116 118 118 118 119 119 119 120 121 121 124 125 127 127 128 128 128 128 129 129 130 © IGD 2006 www.7.9 Best-in-Class Companies 4.10.9.10 Top Supply Chain Projects 4.4 Customer Service 4.8.6 What Unit Measure of Performance Do You Benchmark? External Benchmarks Availability ECR Scorecard How do you Analyse the Root Cause of Success? How Do You Transfer Improved Performance to Other Parts of the Business? 4. Warehousing and Distribution 4.2 Cost Management 4.3 4. International Differences and Emerging Markets (continued) 3.Henkel. Multi Cross Dock 4.2 4.1 People 4.3 Which Service Provider Do You Most Admire? 4. Hungary Case-Study .igd.9.5 4.2 Process 4.6 Availability and Retail Ready Packaging 4.7.1 Demand Planning and Forecasting 4.3 Inventory Management 4.4.Contents (continued) 3.

igd.com/supplychain © IGD 2006 .www.

International Differences and Emerging Markets International Differences in Supply Chain Challenges Opportunities for Global Sourcing Challenges of Global Sourcing Choosing a Distributor Inventory Challenges Modes of Transport Examples of Central & Eastern European Growth 13 14 15 16 22 22 24 26 33 35 40 45 46 56 57 63 74 77 78 86 87 94 96 97 100 © IGD 2006 www.com/supplychain i .igd.Opportunities and Challenges 3. International Supply Chain Barometer Examples of International Retail Expansion Companies Contributing to IGD's Survey Research Sample Job Titles Responding to IGD's Research Views of companies with Supply Chains being of 'Medium' strategic importance Views of companies with Supply Chains being of 'High' Strategic Importance Organisational Structure Unilever HPC Critical Success Factors Lead Logistics Provider by Supply Chain Management Structure Key Supply Challenges Results versus Target 2.List of Tables 1. Supply Chain Optimisation Solution Sets The Process The Process Benefits of GDS Short-Sea Shipping .

Best Practice Supply Chain Management Supply Chain Performance Measurement Matrix Standardisation and Simplification External Benchmarks Root Cause of Success Review and Share Performance Data How do you improve performance? Formal & Informal Methods of Performance Transfer Winning Characteristics for the 'Leading' Retailer Winning Characteristics for the 'Leading' Manufacturers Winning Characteristics for the 'Leading' Service Providers Opportunities for Supply Chain Improvements Focus of Top Supply Chain Initiatives Winning Characteristics 107 109 110 111 114 114 115 117 121 124 125 127 127 130 ii www.com/supplychain © IGD 2006 .igd.List of Tables 4.

List of Figures 1. International Supply Chain Barometer Key Elements in Supply Chain Management Strategic Importance of Supply Chain Organisational Design Balancing In-house and External Operations The Learning Programme Project Plan Process Flow at Each Stage of Implementing NPI to Store 2.com/supplychain iii . International Differences and Emerging Markets Distribution Network in India 4. Supply Chain Optimisation Pressures for Greater Supply Chain Efficiency Global Data Synchornisation Vision What Makes up the Total Product Cost? 3.igd. Best Practice Supply Chain Management ECR Scorecard Process Methods of Performance Transfer Enablers of Supply Chain Best Practice Use of Continuous Improvement Techniques Most Admired Retailer 13 18 21 23 28 37 42 45 46 63 66 77 94 107 113 116 118 119 121 © IGD 2006 www.

com/supplychain © IGD 2006 .igd.iv www.

11. 6. and the key enablers are people and processes. 64% of surveyed companies say that supply chain performance is of high importance to their company but many still think that their sphere of influence does not extend past delivery to the retailer. Cost Management. such as ‘global’ management roles. The emerging markets of China.Managing International Supply Chains Key Findings and Executive Summary Key Findings and Executive Summary Key Findings and Survey Results 1. 4. But there are differences between organisations: from more formalised methods. © IGD 2006 www. The top five focus areas for international supply chain projects have been identified as: Demand Planning and Forecasting. organisational capability and business integration. 2. Tesco and Procter & Gamble were cited as the most admired companies in the industry. Mirroring the trend for ‘end-to-end’ supply chain solutions offered by third party logistics providers. Factory gate collections and cross docking practices are becoming more widespread across international markets. Warehousing and Distribution. but getting it right can yield significant benefits. companies are starting to take a holistic approach to organisational structures and integrate supply chain functions. There is increasing demand for inter-modal services. From a supply chain perspective. Retail Ready Packaging and New Product Introduction. Customer Service. 10. 60% of companies surveyed outsource their warehousing operations. 3. Transferring best practice across geographies should be done in a simplified and standardised way. 7. 8. India and Central & Eastern Europe continue to offer low production costs but now offer significant international retail opportunities. as retailers explore the opportunity of reducing cost and improving service levels. The top three international supply chain challenges have been identified as Demand Planning & Forecasting. Inventory Management.igd. Collaborative practices are fast becoming a pre-requisite to doing business. Production. 5. Where the supply chain is being seen as a key element in driving competitive advantage. whilst 70% outsource their transportation. The challenges of getting businesses to truly collaborate cannot be underestimated.com/supplychain 1 . through to more informal methods of multi-discipline project teams. but a level of harmonisation in infrastructure across Europe is still required before the true benefits can be fully realised. 9.

2 www. now combine with cross-docking. fullload deliveries and competitive tendering. consolidation. Traditional methods of driving logistics efficiencies.igd.Key Findings and Executive Summary Managing International Supply Chains 12.com/supplychain © IGD 2006 . such as tariff management. and leading-edge technologies to create a significant business improvement tool-kit.

Whilst the holistic view of supply chain involves both information and product moving from raw material right through to the end shopper. such as Sales. companies are starting to challenge more traditional organisational structures and integrate supply chain functions. Manufacturing and Distribution tended to be the most commonly-cited functions playing a key role in supply chain. The supply chain is now being seen as a key element in driving competitive advantage.whether at the distribution centre or at the store. sales and production. the move to incorporate more traditionally customer-facing roles. Whilst functions such as Purchasing.Managing International Supply Chains Key Findings and Executive Summary Executive Summary International Supply Chain Barometer Through primary research conducted in 2005.com/supplychain 3 . A large proportion of companies are now outsourcing their warehouse and distribution functions to third party logistics providers. Of respondents: • 60% outsourced warehousing • 70% outsourced transportation © IGD 2006 www. Strategic Importance of Supply Chain 10% 26% High Medium Low 64% Source: IGD Research. Marketing and Customer Services is increasingly apparent.igd. many companies still think that their sphere of influence stops with delivery to the retailer . 2006 Where there is greater understanding of the inter-dependencies between logistics. With 64% of respondents viewing supply chain as being of high strategic importance. organisational capability and business integration. IGD has identified the current status and views of practitioners on international supply chains.

vi. Such integrated solutions may incorporate activities from labelling. and delivering the right service levels. ii. Supply Chain Optimisation A number of factors have been impacting on the supply chain. v. viii. To assist with this added potential complexity. availability and the need to accurately plan and forecast demand. logistics providers are looking to become 'lead logistics providers' with integrated technology solutions. As the supply chain responsibilities have been broadening. Demand Planning & Forecasting Retail Packaging New Product Introductions Fuel Costs Availability Multi-Modal Distribution Labour Shortages or constraints Shrinkage Other Percentage of Replies 72% 54% 54% 48% 44% 24% 22% 15% 9% Source: IGD Research. service. streamlining and improved realtime data. the respondents in the survey cited the top supply chain challenges facing their businesses: Key Supply Challenges Challenges Facing Supply Chain i.igd. The biggest proportion of respondents identified the ability to accurately plan and forecast demand as their number one issue. This issue is particularly important in an international supply chain environment where there is increased uncertainty around lead times and reliability of service. adding complexity and increasing pressure on costs. Such 'endto-end' solutions assist retailers and manufacturers to improve their total supply chain visibility and achieve efficiencies through integration. 4 www. impacting significantly on the likelihood of a shopper finding the product they want. packaging and 'in-store' replenishment initiatives through to global sourcing and international freight management.Key Findings and Executive Summary Managing International Supply Chains Those companies who outsource elements of their supply chain were also aware of the complexities this may bring in managing a number of different logistics operators. in the most efficient and cost-effective way. Improving the levels of collaboration between trading partners will be an important step in meeting those challenges head-on. The chart highlights these pressures. iii. at the time they want it and in the quantity they want to purchase. ix. iv. vii.com/supplychain © IGD 2006 . 2006 On-shelf availability is a key area of focus within all of the top three cited challenges.

Warehouse automation continues to prove that technology can bring significant operational benefits for some companies. Traditional methods of driving logistics efficiencies. such as tariff management. full-load deliveries and competitive tendering.Managing International Supply Chains Key Findings and Executive Summary Pressures for Greater Supply Chain Efficiency More Promotions Congestion Costs Service Levels Availability Demand Planning Global Sourcing & Longer Lead-Times Retail Packaging Price Sensitivity Skilled Labour Shortages Fuel Costs New Product Introductions Source: IGD Research. © IGD 2006 www. and then leasing them back. availability and accurate demand planning. consolidation. now combine with cross-docking. service levels. thereby reducing capital commitments and injecting cash into the business. 2006 Companies are responding through a variety of supply chain initiatives to help maintain total costs.igd. 2006 Whilst some companies are moving into large-scale centralised distribution parks. Solutions are highlighted in the table below: Solution Sets Then Now • • • • • • Tariff Management Full Load deliveries Safety Stocks More Frequent Deliveries Routing efficiencies Competitive Tendering • • • • • • Centralised Distribution Hubs Warehousing Sale & Lease-Back Consolidation & Shared User Initiatives Vendor-Managed Inventory Cross-Docking & Factory-Gate collections Increased use of Technology Source: IGD Research. that will sometimes service several countries from one single location. The following table highlights potential benefits and considerations when looking to introduce automation. others are selling off their warehousing assets. and leading-edge technologies to create a significant business improvement tool-kit.com/supplychain 5 .

Training .the best-designed solution will still fail to deliver the desired results if the software is poorly configured. Automation represents a longterm commitment. 2005/IGD Research. Exception Management . Source: Exel.despite automation.Key Findings and Executive Summary Managing International Supply Chains Benefits of Automation Lower long-term operating costs. Inter-modal activity is on the increase across Europe in particular. as more and more companies look to move freight back onto the rail and canal networks. These differences can be grouped under cultural. from which it is not easy to disengage. internal & external business management issues. The challenges and examples of these are shown in the following table: 6 www. Logistics service providers want to capitalise on improvements in these linkages to offer full end-to-end supply chain solutions. well in advance of implementation. Challenges of Automation High initial capital investment. people are still employed in a whole variety of roles. 2006 Other new technologies like RFID/EPC and the benefits of Global Data Synchronisation remain firmly on the industry agenda. and the opportunities for integrating transport fleets. Improved productivity and speed of response.com/supplychain © IGD 2006 . no matter how small.igd. Factory-gate collections and cross-docking practices are becoming more widespread. road tolls and a lack of investment in transport infrastructure.systems must be designed to be able to manage the exceptions in a user's business model. as retailers in particular understand the real benefits of increased inbound cost visibility. and legislative differences. and these people need to understand the systems and processes in detail. and ideally to have used them before the facility 'goes-live'. because any level of manual intervention or reconfiguration is likely to increase costs. not least the ability to create a solid business case for the large scale investment. There is also a growing trend for short-distance sea-shipping. The marginal cost of volume increases is much less than with manual systems. Improved accuracy in picking and loading. Transport costs account for a significant proportion of total supply chain costs. and these are being challenged across many international markets by fuel cost increases. It can be difficult to adapt if significant business changes occur. There is a requirement for longterm planning and vision. infrastructural & operational. What to Watch Software specification and configuration . legislative changes. However there are still a number of challenges that continue to limit widespread adoption. International Differences IGD's international survey confirmed that companies encountered different supply chain challenges depending on the market in which they operate.

due to short lead-times and demand fluctuations • • • Legislation • Different legislative requirements for permissible ingredients in food products • Switzerland . international franchise operations • • are generally managed differently from wholly-owned stores Critical mass can be an issue in developing markets. shelf-ready packaging. rather than modern supermarkets Infrastructure & Operational • Lack of cold chains in some developing • • • markets Bottlenecks at ports Export and goods movement permit controls A lack of truly international logistics companies means that different contractual agreements have to be made for different countries • No public cold chain logistics supply in China • South American ports • Permit issues in Russia and former Soviet Union states. and pallet requirements Different trade structures.igd.Managing International Supply Chains Key Findings and Executive Summary International Differences in Supply Chain Challenges Theme Cultural Challenge Examples • Different shopper preferences. but with heavy penalties if this is missed The UK is viewed as one of the most difficult markets to satisfy. 2006 © IGD 2006 www. India and China Internal • Demand volatility depending on brands lifecycle • For retailers. compared to 'home territory' orders which can be very volatile Availability issues in some developing markets can be solved through using extra lower-cost labour. leading to service level issues When exporting.com/supplychain 7 . whereas in more developed markets alternative solutions are required • External • Different approaches to bar-coding. require different outbound logistics solutions and demand planning Different performance management • In the UK and northern Europe there tends to be more centralised distribution and delivery into distribution centres. the required quantities are often fixed well in advance. whereas in France it could be delivery on the day. • packaging. Spain and southern Europe. particularly • with regards fresh produce Different language variants/customisation • Germany prefers lean meat • Japan prefers meat with more fat • Indians prefer to shop in wet markets for fresh produce. whereas in Italy. case-sizes.vis-à-vis the adoption of the European Working Time Directive . there is a tendency for more direct-to-store deliveries The UK focuses heavily on delivery within a fixed hour delivery slot. with different levels of market concentration.Transport • Different requirements for ingredient declarations and labelling • Different legislation for driver hours Source: IGD Research.

Key Findings and Executive Summary Managing International Supply Chains The emerging markets of China. especially as international retailers hold only 3-4% share of the total grocery market. could have the wood imported from Brazil.igd. and a cheaper.New markets expand at a quicker rate than more developed markets (China +8% growth compared to the EU average of +2%). India and Central & Eastern Europe offer a plethora of opportunities for the food and grocery industry. flexible workforce. flexible and well-educated work force 3. and countries have specialised over time so that companies must act global to reach every production zone.9% retail growth in 2005 alone. and India has focused on home textiles. but relatively untapped consumer demand. be crafted in Vietnam. With 12. With widespread investment from the leading international food & grocery players. A large. 4. Source: Auchan 2005/IGD Research. 2006 Nevertheless.This global reach means that wooden furniture. in terms of global sourcing. Opportunities for Global Sourcing 1. which can help improve margins. 5. as the Chinese government continues to reduce restrictions on foreign direct investment. Buying directly from the factory on an 'ex-works' basis could bring a margin bonus of anything from 10-50%. but then sold into the EU. further supply chain development will certainly encourage this trend. but are also opening increasing numbers of stores. garments and decoration. shoes. 8 www. driving further investment and stability. Thailand has looked at food and plastic products. for example. High local growth . and large populations with high. combining the size of these countries and the remoteness of some of their populations. For example whilst China has focused on garments. this is an attractive option for many companies. • China The Chinese economy is booming. Lower wages 2. A combination of organic growth and supply chain development will help retailers consolidate their market positions. Opportunities in global sourcing include high local growth rates. cheaper production costs.com/supplychain © IGD 2006 . IGD predicts that China will become the second largest food retail market in the world by 2020. with India also moving into a top five position. there are significant challenges for the speed of supply chain transformation. The market for prime materials is already global. hardware and electrical goods. with a number of legislative restrictions and infrastructural limitations. and in times of consistent margin pressures. and retailers are not only sourcing large quantities of product from the country. competition is on the increase.

Best Practice Supply Chain Management Transferring best practice across departments. but without the long transit times for delivery. transport. and so it is fair to say that there has not been the same level of investment in developing modern retailing practices and new transport links as has been the case in China. and inventory. markets and geographies is a key method for driving international efficiencies and improving end-to-end capabilities.Managing International Supply Chains Key Findings and Executive Summary • India India currently restricts foreign direct investment from multi-brand retailers. Leading manufacturers. the Czech Republic and Hungary. and with the use of field sales forces. as a result of significant political change and the subsequent high levels of economic growth. the countries of Central & Eastern Europe have also become attractive places to invest. The following matrix shows examples of supply chain performance indicators: © IGD 2006 www. however. and via the distributor route to market. service levels.com/supplychain 9 .igd. The advantages of countries such as Poland. are able to reach the most remote areas of the country and improve their brand awareness. are present in the Indian market. Key supply chain performance measures focus primarily on: availability. warehousing. but this should be done in a simplified and standardised way. order fulfilment. forecasting. are that they benefit from cost-effective labour and a culture of hard work. in terms of both manufacturing production and international retail expansion. Distribution Network in India Sub-Warehouse Manufacturer Retailer Distributor Wholesaler Retailer Shopper Source: IGD Research. Order fulfilment is the most common performance measure. financial indicators. 2006 • Central & Eastern Europe Similarly to China and India.

2006 External benchmarking is gained primarily from the retail customer sharing information on cross-supplier performance and is often based on order fulfilment and availability. late deliveries & delivery windows • Drop-size • % of direct delivery • Vehicle utilisation • Load efficiency • Distribution cost per case/m3 • Cost by kilometre Warehousing • Pick Accuracy • Pick Rates • Cost per case • Handling costs per m3 • Cost per pallet Other • All components of the 'perfect order' • SKU complexity • Waste/Write-off • Non-quality costs • Lead-time achievement • Time/Speed to market • Information efficiency • Distribution build • Cost of production of best quality product (which is different for different regions) General Financial • Supply chain costs as a % of net sales • Lost Sales • Invoice accuracy • First-time invoice acceptance • Low code sales • Cost savings • Cost per unit delivered • Cost vs.com/supplychain © IGD 2006 . In addition. industry bodies. including the ECR Scorecard. External Benchmarks Customer Industry Body/Expertise Other • Customer OTIF • External consultants x3 • Customer tables or service • IGD level reports. turn-over • Profitability vs. comparing • ECR Scorecard with peers • ELUPEG forum (intercompany comparisons) • Retailer KPI's • Retailer availability data • Case fill rate (shared by retailers) Source: IGD Research.igd. 2006 • Nothing concrete . volume vs. there are a variety of other methods used by companies.Key Findings and Executive Summary Managing International Supply Chains Supply Chain Performance Measurement Matrix Availability • On-shelf availability (OSA) • Items out-of-stock (OOS) • Stock availability • Supplier/Wholesaler availability by SKU Order Fulfilment • On-Time In-Full (OTIF) • OTIF (All costs) • Case fill rate • Order fill rate Forecasting Service Levels • Forecast accuracy • Customer service • MAPE (Forecast error) • Supplier delivery performance • Conformance to manufacturing plan • Service levels • SKU forecast accuracy • Sales forecast accuracy Inventory • Inventory management • Stock-holding • Stock turnover ratio/Forward weeks' cover • Working capital (Inventory values) Transport • On-time deliveries. cost Source: IGD Research.based in international experience • Tendering • In-market distributors • None 10 www. and external consultancy firms.

such as 'global' management roles. from more formalised methods engraved in organisational structure. with accountability for developing. Multi-Functional Project Teams Informal Word-of-mouth Source: IGD Research. Formal & Informal Methods of Performance Transfer Formal Global Roles Some organisations have global roles. then improvements become visible to all geographies.com/supplychain 11 .but with no specific PR exercises. Word-of-mouth . In this way. These can take the form of country visits. spreading and training best practice solutions. teleconferences. and monthly steering committee meetings. total quality management initiatives and lean methodologies. Europe). Reporting & Meetings Weekly or monthly reporting methods. greater internal and external communication. These can be a very effective way of driving crossfunctional understanding and communication. including collaborative work between trading partners. Process management is the most common method employed by the international companies surveyed by IGD. the key enablers for supply chain best practice are people and processes. Improved use of data. there are differences between organisations.igd. 2006 There are a number of standardised continuous improvement techniques used across the food & grocery sector. Some organisations argue that if the business is managed at an international regional level (e. © IGD 2006 www. and focus on inventory management and forecast accuracy are all key factors in improving overall performance. In terms of transferring best practice around the business. and are essential for many project design and implementation initiatives. through to more informal methods via multi-discipline project teams. Collaborative project teams with the retailer customer can also ensure that strategic goals are aligned. intranet utilisation and best-practice presentations. are used to share performance results and best practice solutions.Managing International Supply Chains Key Findings and Executive Summary Root cause analysis of good performance is most likely to be shared around a business via internal reporting methods and communication processes.g. The production environment lends itself to process re-engineering techniques. particularly amongst the supplier base.

2006 Winning Characteristics for the 'Leading' Manufacturers 1. 5. 2006 'Best-in-class' can represent something slightly different for a retailer (collaborative).com/supplychain © IGD 2006 .igd. but there are also some distinct similarities across the end-to-end supply chain for a winning business formula. a supplier (brand management) or a service provider (cost effective). The characteristics displayed by recognised leading retailers and manufacturers are highlighted in the tables below: Winning Characteristics for the 'Leading' Retailer 1. 2. 4. Innovative Effective brand management Speed-to-market Excellent customer management Scale and agility of supply chain Source: IGD Research. 3. Strong customer focus 2. companies most admired by the Supply Chain Executives included Tesco and Procter & Gamble. Growth (Sales & Profitability) Strong customer focus Integrated supply chain Distinct business model Strong collaborative relationships Source: IGD Research. 5. Amongst others. The companies that came out on top of the IGD international supply chain poll all show elements of the following key characteristics in their business models: Winning Characteristics 1. IGD's supply chain survey asked companies to choose a best-in-class company retailer. supplier and service provider. Operational delivery 3. 4. 2006 Finally. 2. Innovation Source: IGD Research.Key Findings and Executive Summary Managing International Supply Chains Use of Continuous Improvement Techniques 9% 20% 41% Business Process Re-engineering Total Quality Management (TQM) Lean Methodologies 20% Six Sigma Total Productive Maintenance (TPM) 24% 24% Note .companies can choose more than one technique Other Source: IGD Research. 2006 12 www. 3.

companies are starting to challenge more traditional organisational structures and integrate supply chain functions. in the most efficient and cost-effective way. • Where there is greater understanding of the inter-dependencies between logistics. and all three of the above issues can impact significantly on the likelihood of a shopper finding the product they want. • The top supply chain challenges for the food and grocery industry includes accurate demand planning & forecasting. These same companies are also aware of the complexities of managing a number of different logistics operators across markets. On-shelf availability is a key area of focus.igd. organisational capability and business integration.Managing International Supply Chains 1. and the management of new product introductions. © IGD 2006 www. and delivering the right service levels. sales and production. retail packaging. • Improving the levels of collaboration between trading partners will be an important step in meeting those challenges head-on. whether at the distribution centre or at the store. streamlining and improved real-time data. Cost and information management are key challenges for a number of the companies surveyed by IGD for this report. However. International Supply Chain Barometer 1. • A large proportion of companies are now outsourcing their warehousing and distribution functions to third party logistics providers. and in the quantities they want to buy. at the time they want it. • Logistics specialists are now offering 'end-to-end' international supply chains solutions to help retailers and manufacturers improve their total supply chain visibility and achieve efficiencies through integration. The supply chain is now being seen as a key element in driving competitive advantage. many companies still think that their sphere of influence stops with delivery to the retailer. International Supply Chain Barometer Summary • A holistic view of supply chain involves both information and product moving from raw material right through to the end shopper.com/supplychain 13 .

European and Global management accountability. Examples of International Retail Expansion Carrefour South Korea is set for another 15 new hypermarkets over the next three years. Against a backdrop of price deflation. through to Regional. but reactivity and flexibility has reduced. shopper demand for more choice. mostly in Moscow. Could open its first cash n' carry store in Pakistan in early 2007.1 IGD’s International Survey Key Points to Note • Collaborative logistics is seen as a key opportunity to find the right balance between an efficient cost save and time to market. Japan. as the booming economies of India.This would be Metro's 31st country and its fifth Asian location alongside China. Metro Pyaterochka Tesco Wal-Mart Source: IGD Research. 14 www. • Supply Chain Executives surveyed held a mix of country-specific responsibilities.igd. • 44 companies contributed to IGD’s International Survey. bringing their total to 295 and a number three market position. adding to their existing ten stores through a joint-venture. Vietnam and India. and yet on-shelf availability continues to challenge the industry. In the last ten years. through an acquisition of 140 stores. Central Europe. global trade of consumer goods has leapt from over 5% growth per year to double-digit growth.com/supplychain © IGD 2006 .1. The whole supply chain (retailer and supplier) demands less inventory. 2006 With an increasingly promotion-led marketplace and extended lead-times from global sourcing. and varying customer loyalty. Set to open 20 more stores in Malaysia within the next five years. International Supply Chain Barometer Managing International Supply Chains 1. the market for consumer goods is now very much a global phenomenon and continues to grow at an accelerated pace. • A broad spectrum of businesses (UK and International) have a vested interest in international supply chains. Western Europe and Japan on the world trading stage. Reinforced its international presence in Brazil. with three new stores and re-furbishment of existing units planned for 2006. and also plans to have 30 stores in the Ukraine by the summer of 2006. and China have joined the more traditional markets of America. The Russian retailer has acquired another 25 stores. demand variability has increased.

beliefs and future predictions of Senior Managers who are responsible for driving international supply chain efficiencies. Allied Domecq Spirits and Wine ARC Advisory Group Arc International Arla Foods (UK) plc Bacardi-Brown-Forman Brands Campbells Grocery Products Carrefour Czech Republic Colgate Palmolive (UK) Ltd Cott Beverages Ltd Diligio Advisers AB Elizabeth Shaw Ltd EverNew Int Inc. Consequently. 1. IGD's new report aims to discuss just some of those challenges.com/supplychain 15 . It will highlight supply chain complexity with key emerging markets. Companies Contributing to IGD's Survey Research ACR Logistics AJC International Inc. This unique research. ExxonMobil Freudenberg Household Products Golden Wonder Ltd Habitat UK Ltd HJ Heinz Frozen and Chilled Foods Ltd HP Foods Information Resources KPMG Source: IGD Research.igd. SSL International Unilever Universal Pictures International Universitat Autnoma de Barcelona University of Colorado Weetabix Ltd WD Irwin & Sons Ltd © IGD 2006 www.1. Developing collaborative logistics is therefore now seen as a key opportunity to find the right balance between an efficient cost base and time to market. explores the facts. conducted in November 2005. provide a variety of case-studies and examples of innovative solutions. International Supply Chain Barometer Companies are therefore looking for even greater supply chain efficiencies to support business sales and growth strategies through excellent customer service. The following tables indicate the companies and a list of sample job titles that contributed to IGD’s research for this section of the Managing International Supply Chains report. IGD carried out an on-line survey of Senior Executives to provide both a quantitative and qualitative insight into how leading companies manage their supply chains internationally.1 IGD Research Methodology In order to supplement the extensive number of case-studies included in the Managing International Supply Chains report. and share examples of best practice management across the international food & grocery industry. the challenges of managing international supply chains have never been greater. 2006 Kraft International Commerce Kraft Foods Lion & Dolphin Liven SA Logisys A/S Lornamead Europe Ltd Masterfoods Mondi Hypac Muller Dairy (UK) Ltd PIC (part of Sygen International) Proctor & Gamble Sara Lee International SCA SC Johnson Seegrid Corp.Managing International Supply Chains 1.

Although this contrasts with the relative few numbers of retailers with significant international presence. logistics. the wide response to the survey provides some interesting insight into best practices and thought leadership in this vital area of operation. IGD asked respondents to specify their type of business. packaging companies and other specialist producers.1.2 What is Your Business? In order to understand the range and role of participating companies within the food and grocery sector. and packaging companies. and are now often at the very forefront of driving innovation in supply chain management. through the variety of international casestudies in this report. It is perhaps not surprising that IGD’s research into international supply chains gained the most responses from manufacturing companies. In this way. • The vast majority of respondents classified their company as a Fast-Moving Consumer Goods (FMCG) supplier with 65. and a share of voice in the survey.igd. • Retailer responses represented 8. it is fair to say that leading retailers are becoming increasingly adept at using their supply chains as a means of competitive advantage. International Supply Chain Barometer Managing International Supply Chains Sample Job Titles Responding to IGD's Research Director Outbound Logistics W.1. • The remainder was made up of logistics service providers. Combined with participation across consultancy firms. it is often the suppliers who have the most experience in managing supply chains internationally and the challenges that different markets and cross-border movements can present. These organisations represent the largest single group within the food and grocery sector.2% of the total responses. Europe European Logistics Director European Sales Manager European Supply Chain Director European Supply Chain Project Manager Head of Logistics Head of Planning & Customer Service Head of Supply Chain Head of Warehousing and Logistics International Business Account Manager International Commercial Manager Source: IGD Research.7% of replies. and this continues to be a growing trend as companies place strategic importance on driving global branding and scale efficiencies. 16 www. Global operations management and international manufacturing have long been at the heart of their production and distribution processes. 2006 International Logistics Manager International Retail Operations Director Logistics Director Manager Global Customer Services Nordic Sales Director and Category Director Sales and Marketing Director Sales Director Supply Chain Information Manager Supply Chain Manager VP Business Development 1. • The next largest group was Management Consultancy Firms at 10.com/supplychain © IGD 2006 .9%. from product sourcing right through to the shopper’s instore experience.

1.igd. • • • • • • • • • Caribbean Czech Republic Denmark Europe France Germany Global Hungary Indian Sub-continent • • • • • • • • Ireland Middle & Far East Scandinavia South America Spain UK USA Western Europe © IGD 2006 www.3 Which Country Operation(s) Do You Represent? To ensure a truly international perspective on supply chain challenges within the industry.com/supplychain 17 . International Supply Chain Barometer 1.Managing International Supply Chains 1. The Supply Chain Executives surveyed held a mix of Country-specific responsibilities. European and even Global management accountability. the survey asked respondents to highlight the geographic responsibilities of their role. through to Regional.

1. • There is a growing trend for Sales & Marketing functions to be integrated into the supply chain structure. Specifically.igd. International Supply Chain Barometer Managing International Supply Chains 1. • Managing the international supply chain as part of a 'global operations' business model is prevalent amongst many of the leading manufacturing companies. IGD asked survey participants to define the term ‘supply chain’ from their company’s perspective. 2006 18 www. make. or a more compartmentalised view of the role of supply chain and how it interacts within organisations. 1.1 The Definition Is it the ‘buy. whether at the distribution centre or at the store.com/supplychain © IGD 2006 . move and sell' functions in the business? Key Elements in Supply Chain Management Product Raw materials Manufacture Distribution Retailer/Wholesaler Consumer/Shopper Information Source: IGD Research.This helps us to understand the role of logistics professionals within the food and grocery sector.2 The Supply Chain Overview Key Points to Note • Many companies still think that their sphere of influence stops with delivery to the retail customer.2. • 64% of companies surveyed by IGD say that supply chain performance is of high strategic importance to their company. but also the structure of the leading companies. IGD was interested in whether there is a holistic view. and externally with trading partners.

or the supply chain stopped either at the retailer (customer) warehouse.Managing International Supply Chains 1. it is fair to say that no single company was able to mention all of the individual components explicitly. so that ‘shelf’ is now synonymous with ‘shopper’: Definition of 'supply chain' within each company Scale of Definition • "The flow of information and product between the various parties from raw materials supplier to customer (retailer) shelf" "All activities dealing with information and physical merchandise flow from procurement and manufacturing to POS (point-of-sale)" 'Text-Book' • Source: IGD Research. 2006 Nevertheless. 2006 In this way. and the need for an integrated end-to-end view of the role of supply chain: Scale of Definition Definition of 'supply chain' within each company • "From inbound factory flows through to on-shelf availability" 'Raw material to shelf' • "The ability to get the right product to the shelf at the right time at the most effective cost" Source: IGD Research. Even when most elements were mentioned. with no mention of the importance of ‘information’. the end shopper who purchases the product was often excluded from the definition. Either the focus was on ‘product’. the role of their supply chain stops either at the retailer’s depot or store.com/supplychain 19 . for many companies. International Supply Chain Barometer If we consider the above diagram which aims to re-group all of the main links and elements in the end-to-end supply chain. many companies now recognise the importance of on-shelf availability. store or shelf. so that the flow of product to the shelf and the shopper remains the primary role of the retailer: © IGD 2006 www. the ‘last 50 metres’.igd.

20 www. IGD’s survey sought to understand the current linkages between internal departments. others still have a more traditional view.”In this example.1. 1. International Supply Chain Barometer Managing International Supply Chains Scale of Definition Definition of 'supply chain' within each company • "The purchase and delivery of product from 'Stops at store' supplier to store" • "A fluid.” Organisations expect supply chain initiatives to have more equal consideration of the needs of both retailer and supplier. it was interesting to note: • The importance of equitable trading relationships: “The efficient transfer of information and product to meet customer and supplier requirements. • The focus of the trading relationship: “Manufacturing through to shelf (executive level) and forecasting to shelf (focus level with customers). one of the key factors in the supplier-customer supply chain relationship is the link between the demand forecast and on-shelf availability. 2006 Finally. reliable flow of merchandise going to the stores" • "Total • 'Stops at warehouse' supply process from ingredients/packaging procurement to delivery to customer depot" "End-to-end process from supply of raw materials to manufacturing plants to delivery of product to customer warehouses" • "Material ordering through demand 'Factory-focus' • forecast and distribution to retail" "Management of customer demand…management of inventory forecasts and production levels" Source: IGD Research. where supply ends at the back-door. Overall.com/supplychain © IGD 2006 .2. by asking which functions or departments were considered part of ‘supply chain’.2 Which Functions or Departments are Part of Supply Chain? A holistic view of supply chain can be facilitated by the organisational structure of a company.igd. so that where some companies have accepted that their sphere of influence has moved down the supply chain and into the store environment. the role of supply chain seems to vary quite considerably from one organisation to the next.

com/supplychain 21 . and cross-departmental training are all key outward signs of supply chain being considered of high strategic importance. and departments such as IT. to include planning & forecasting. However. IGD’s survey asked whether supply chain was of high. and were mentioned infrequently by companies in the survey. supply chain can be viewed as a key weapon in driving competitive advantage. highlighting the physical transformation and movement of product around a business. Strategic Importance of Supply Chain 10% 26% High Medium Low 64% Source: IGD Research. medium or low strategic importance. order processing. it is equally true to say that those parts of the chain that have been traditionally considered as more customer-facing. A selection of views is provided in the table below. What this actually means in operational terms varies considerably however from company to company. Where in previous times there have been organisational divides between commercial and distribution roles. Sometimes more detail was provided.Managing International Supply Chains 1. a focus on improving on-shelf availability. such as Sales & Marketing and Customer Service. International Supply Chain Barometer In response. 1. or logistics & warehousing. quality. Human Resources and Finance are still viewed very much as ‘support functions’ to supply chain.igd. Nevertheless. © IGD 2006 www. 2006 High Importance Over 64% of responses said that supply chain was considered as being of high importance in their company strategy.3 How Important is Supply chain in Your Company’s Strategy? In a highly competitive and challenging business environment. Purchasing. Manufacturing and Distribution tended to be the most commonly-cited functions playing a key role in supply chain. there is not complete alignment across all functions. alignment between these sometimes distinct parts of the chain now appears to be widespread. and may even depend on how a particular individual interacts within the organisation.2. are increasingly being integrated into ‘supply chain’. where inventory management.

production operations. It is interesting to note here that the main differences between medium and high importance are the operational practices and the links between parts of the chain. This means that companies need to have ‘visible’ signs of the importance of supply chain within the company – for example.com/supplychain © IGD 2006 . real end-to-end processes and cross-functional interdependencies .for it to be considered by employees as being of high strategic importance. the remaining 10% of replies believed supply chain was considered as being of low strategic importance for their company. and that the logistics element is viewed simply as supporting that primary function. and sales. International Supply Chain Barometer Managing International Supply Chains Views of companies with Supply Chains being of 'High' Strategic Importance • "Fixing empty shelves is a priority and a multi-billion dollar opportunity" • "I have recently run a series of Supply Chain awareness sessions with all staff. The key issue currently is creating efficient linkages with each of the functions" • "Control of inventory at all stages is vital to cash flow.igd. Whilst it is not surprising to learn that this group included a number of the management consultancy firms. 2006 Low Importance In contrast. then it is indeed possible for production and sales to be viewed as the primary focus of the manufacturing company. then the consumer will have more sustained opportunity to purchase our product" Source: IGD Research. 22 www. 2006 Medium Importance 26% of replies said supply chain was of medium strategic importance. it was somewhat more surprising to find a number of leading manufacturers who also believed that supply chain was not considered of high importance in their company strategy. If we can exploit the supply chain. Views of companies with Supply Chains being of 'Medium' strategic importance • "Not yet walking the talk" • "Supply Chain as a function is beginning to get recognition within the business" • "We have too big an emphasis on manufacturing competencies versus true supply chain competencies" • "We see the supply chain as an area to achieve efficient implementation of our brand/trade marketing plans. production efficiencies and customer • • service" "Emphasis is on operational management of a business plan to ensure maximum possible levels of customer service" "Supply chain seen as a way to gain competitive edge" Source: IGD Research. If there is not a holistic approach to supply chain management. and departments work in silos across warehousing and distribution. to whom supply chain activities per se would be expected to be of low importance.1.

© IGD 2006 www. and with a growing trend towards the outsourcing of warehousing and distribution to third party operators – the argument being that these activities are indeed ‘non-core’ – then there is some logic to the view that supply chain cannot subsequently be considered of high strategic importance. and often the reality is that the supply chain is managed as a mixture of all three options. and the smallest number managing their supply chains at a national level. 1.com/supplychain 23 .Managing International Supply Chains 1.2. 2006 In response. in order to understand both the level of internationalisation and the degree of supply chain integration. within this overall view. with 41% of respondents. International Supply Chain Barometer Where functional inter-dependencies are not explicitly included in organisational design. there are variances. whether at a regional. Nevertheless.4 How is Your Supply Chain Managed? Companies were asked to explain how their supply chains were managed. national or international level. Organisational Design 24% 41% International Regional National 35% Source: IGD Research. followed by 35% managed at a regional level. the majority of companies said their supply chains were managed internationally.igd. at 24%.

or products. and transfer best practice across different markets and operating companies. structure themselves at a regional international level. Americas. Rest of World (ROW). Source: IGD Research. with shared SKUS. • SSL International The commercial aspects of supplier-retailer • Unilever. so that best practice can be shared across the international organisation. despite being part of a large • Arla international group. will still manage their supply • Müller Dairy chains autonomously at a country-level.igd. mature markets are • Kraft • managed at a national level. • Bacardi whilst the rest of the chain will be managed locally.com/supplychain © IGD 2006 . • Procter & Gamble International teams will manage the purchasing • Colgate-Palmolive through to the production part of the supply chain. relations will often operate at a more regional international level. one of the many challenges in driving scale economies is how to implement cross-border synergies. • Sara Lee International • particularly for secondary deliveries into retailer premises. especially in terms of factory • Masterfoods production and commercial. whilst developing markets are regional. National & Regional • For some organisations. Source: IGD Research. 2006 Implications IGD believes that for many global international organisations. Global manufacturing sites feed multiple regions and then countries. 2006 24 www. International Supply Chain Barometer Managing International Supply Chains Organisational Structure Type of Design Global Operations Characteristics Example Organisation • Manufacturing will often be managed at a 'group' Companies showing elements of this type • • • of management structure include: level. where appropriate. Asia Pacific. thus as part of 'global' operations. The senior supply chain team will often report into the international head-office. for example. All divisions report internationally. National • Some companies. and will aim to drive cross-border efficiencies. Regional International • Some organisations.1. Western Europe. such as Europe. The management of supply chain best practice within surveyed companies is discussed later in this chapter.

Managing International Supply Chains Unilever is a leading manufacturer of FMCG. This contact is empowered to negotiate on price. • Alignment with the rest of the Unilever business. Dove and Comfort.Unilever. Process I . © IGD 2006 www. to develop deeper understanding and knowledge of the market. terms and conditions on behalf of all regions. brands on sale in 150 countries. avoid bidding against themselves. there have been 4 key drivers for Unilever HPC to consider managing their supply chains on a global or regional basis. • Excellence: in their ability to leverage skills and expertise. • How? Through a defined management structure (made up of a global supply management director. whilst the process and systems includes people and information management. to enable global innovation and simplification and to manage supply constraints more effectively. Four Key Drivers • Scale: in supply of materials. • Why? Unilever HPC has introduced a global supply management programme to leverage their scale with suppliers. formal and informal networks. with brands such as Cif.Global Executive Supply Management (GESM) • What? GESM has created a single point of contact for a material or group of materials. maintaining and implementing supply strategies. whilst being able to react to individual customer demands at a local level. with close to 300. manufacturing and distribution.com/supplychain 25 . Unilever products range from fabric cleaners through to hair/skin care and deodorants. Unilever's GESM uses a combination of strategic and operating frameworks. and technology and administrative support teams). thus securing materials supply on a global basis and developing. Context Against an industry backdrop of tightening margins in a climate where fixed assets and working capital are taking a larger proportion of sales. regional team members. and strong positions in both developed and developing markets. categories and brands.Within the Home & Personal Care (HPC) division. • Speed: in delivery of innovation and responsiveness. and a code of business principles. International Supply Chain Barometer Case-Study .000 employees.igd. and processes and systems. including the decision-making and contractual frameworks. The operating framework concentrates on clear roles and accountabilities.Managing International Supply Chains 1. and project and performance management techniques.

5. 2. who play a key role in deploying the strategy locally through a series of work plans and scorecards.igd. regionally and locally. Creation of supply market specialists. focused projects with fewer suppliers. 2005 Strategic Deployment The overall divisional strategy will be split down for both categories and regions. Unilever aims to deliver exceptional top and bottom line growth. Invest time in the operating framework. • How? Through a number of critical success factors (CSF). which drives global capability. Source: Unilever. ensuring clarity of roles and accountabilities globally. Feb. Executive buying as an enabler of global innovation. Unilever HPC aims for regional and local accountability. 3. Unilever HPC Critical Success Factors Innovation Delivery Customer Service Excellence Cash for Growth Corporate Social Responsibility Organisation and People • • • Design for manufacture Early equipment management Vertical rampup • • • Output reliability Reduced leadtimes Late variant additions (postponement) • • • • • Operational efficiencies Capacity utilisation Line speeds Manufacturing savings Waste reduction • • Environmental targets Employment policies • • Global and regional virtual sites (GVS/RVS) Skills development programmes Source: Unilever HPC. It is important to invest in developing informal networks and relationships.Strategy into Action in Manufacturing • What? The 'Strategy into Action' initiative aims to deploy the global and regional manufacturing strategies through the organisation and down to the local shop-floor production environment.com/supplychain © IGD 2006 . 4. Unlocking global economies of excellence. This can then be communicated through the Global and Regional Virtual Sites. Process II .1. International Supply Chain Barometer Managing International Supply Chains • Results (between 2001 and 2004) 85%of global spend was through the executive teams. Everything flows from the original vision and strategy. A consistent information structure. it is imperative to have clear common key performance indicators in all territories. 2005/IGD Research. 2006 26 www. Large-scale. Processes and information must be aligned to this framework. and then translated into a category and regional supply chain strategy. Although a challenging process. Globally-synergised spend Global co-ordination in supply crisis. Unilever Key Learnings 1. speeds and scale in the supply chain.

Like most of Zara's store openings. This helps to retain higher exit margins with subsequent 'markdowns' close to half the industry average (Source: Zara UK). International Supply Chain Barometer Case Study . it more closely emulates a ‘make to order environment’. giving an air of exclusivity about the Zara brand. Inditex opened 323 stores and by 2009 aims to nearly double its total number of stores to 5000. Zara is driven by the introduction of new designs. 2006 No. anticipation about the impending store opening spread quickly by word of mouth. The focus is on selling through. It is part of a bigger group of companies owned by Inditex. Casablanca Source: Zara UK. all the directors arrived two days before the opening to unload the garments from the vehicles and merchandise the stock in store.com/supplychain 27 . With no formal advertising.500 stores across 400 cities in 58 countries generating sales of €66bn. It allows more stock to be made available during the season it is sold (in season). In turn building up anticipation amongst the customer on the next exciting new design to come into store. 2006 Zara 15-25% 50-60% 40-50% Industry Average 45-60% 80-100% 0-20% © IGD 2006 www. It operates eight independent formats of which Zara is the dominant format. of Stores 816 143 414 356 344 254 139 101 Background Zara is a fast fashion retailer that has a highly responsive supply chain enabling it to get new fashions onto the marketplace in a matter of weeks. Inditex has over 2.ft.Managing International Supply Chains 1. Confirmed Stock 6 month pre-season Start of season In season Source: Zara UK. The most successful store opening in Zara's history was the 20. Dublin. A big selling item may well mean a store only receives ten of those items. Zara’s model differs from conventional clothing retailers. During 2005.Zara’s Vertical Supply Chain Formats Zara Kiddy's Class Pull&Bear Massimo Dutti Bershka Stradivarius Oysho Zara Home Zara Store. encouraging feedback from junior staff on what works and what doesn't. site located on Henry Street.igd.000 sq.

com/supplychain © IGD 2006 . Distribution Executives Manage the available stock with the orders required by stores. Commercial Monitor sales patterns and adapt collections to the tastes of each country. having a significant supply base in Spain is more expensive than sourcing from Asia . sourcing. Balancing In-house and External Operations Supply of Fabrics Manufacturing 40% 40% 60% Inhouse (Zara) External (Outsourced) Source: Zara UK 60% Clearly. It’s vertically integrated business undertakes a variety of activities in-house from design. distribution to running retail operations. sell product and feedback comments and new design ideas. Buyers Source material and negotiate with suppliers. Stores Merchandise stock. Modelists Make patterns and sample garments. All functions of the business continuously work together in teams able to produce new collections each season. Asia is used more extensively to produce steady or permanent lines. which are updated and completed on a weekly basis. International Supply Chain Barometer Managing International Supply Chains Vertical Supply Chain Zara operates a unique model in the fashion industry. Designers Attend international fashion events and create designs. 'Zara even sources the marble for its shop floors from its own quarry'. manufacture. This is particularly true for fast fashion items where over 50% is produced in Spain and 26% from the rest of Europe.igd.but the increased flexibility of producing to demand is an advantage. continuously renewing the fashion offer.1. 28 www.

Stores order their own stock from an offer they receive twice weekly from the commercial managers who then have to negotiate the stock for their respective country of responsibility. Typically order lead time from factory to store is 1-2 days. This in turn helps to control the range density instore.igd.This is achieved by the 127km of moving rails that connects the DC to the manufacturing site on the opposite side of a road (product moves on rails under the road).Managing International Supply Chains 1. 2006 The depot in A Coruña is a cross docking facility where most of the stock is shipped onwards to Zara and not held for long periods on site.com/supplychain 29 . Stores are ranked according to level of sales and forecast accuracy and receive priority orders as a result. Barcelona) Stradivarius (Cabrianes. the A Coruña warehouse sends out stock to all of Zara's stores twice a week. Zara doesn't mark down its products because if the product is not selling they stop manufacturing it. Distribution Nearly all of Inditex stores receive deliveries centrally from Spain. but only within two distinct periods during the year at the end of Winter and Summer. Barcelona) Source: Zara UK. New product is made available to countries after successful trials and is not pushed onto the stores. International Supply Chain Barometer The continuous feeding of ideas is a key feature of this chain from store staff inputting potential design trends to manufacturing extending the length of a sleeve of a particular garment to more fully reflect the average size of an individual in a country. Bershka and Oysho (Tordera. These highly mechanised distribution centres are dedicated to the individual store formats:: • • • • • • Zara Logística (A Coruña) Plataforma Europa (Zaragoza) Tempe (Alicante) Pull and Bear (Narón. As a new product is made available for sale. Commercial managers pre-warn countries of upcoming styles. They do hold sales. © IGD 2006 www. Apart from a small warehouse in Mexico. A Coruña) Massimo Dutti. within 2 hours the manager's feedback the customer response and identify if it is a good or bad seller. Just as new styles are introduced. Commercial Managers decide the cut-off point when the product is considered unsuitable.

Zara maintains a higher percentage of full price sales.igd. getting a new product into store in a matter of weeks compared to months for a typical competitor. For international deliveries the product is delivered to the border of the country. In Summary Zara's vertically integrated supply chain supports its fast fashion business model. Controlling all aspects of the supply chain gives it the flexibility to customise the garment to meet the changing needs of its customers all over the world. With no advertising costs it relies on the strength of its offer and the anticipation amongst it customer base to create awareness and brand recognition. In an environment where discounting is commonplace. Source: IGD Research. 2006 30 www. 2006 All product deliveries are made from the central sites in Spain. and the corresponding logistics provider for that country takes over the distribution to the store.com/supplychain © IGD 2006 . It helps to increase the speed to market. International Supply Chain Barometer Managing International Supply Chains Materials Distribution Source: Zara UK.1.

igd. and partner companies. departments. but few companies have a lead-logistics provider managing their endto-end supply chain. the challenge for the supply chain teams is how to promote the seamless integration of product movement and supply chain management across locations. the levels of outsourcing tend to increase. The reasoning behind such initiatives is the ability to improve full supply chain visibility. the survey asked respondents: • Is the supply chain managed internally. departments. For both warehousing activities and transport movements. and countries. International Supply Chain Barometer 1. • In response to some of these complexities.com/supplychain 31 . 1. • 60% of surveyed companies said that their warehousing activities were outsourced to a third party logistics provider. thus driving efficiencies.Managing International Supply Chains 1.1 Penetration of Outsourcing to Third Party Logistics Providers In organisations where logistics is outsourced. To this end. providing extensive services? © IGD 2006 www. and now aim to manage the whole end-to-end supply chain. and simplifying both reporting and event management for the customer. In response to this trend. many third-party logistics providers continue to broaden their service offering. compared to 70% of companies who outsource their transport operations.3.3 Outsourcing Key Points to Note • Seamless supply chain flow is a challenge for many companies operating across different locations. a preferred logistics company. whilst benefiting from the advantages of not having to manage all of the links in the chain directly themselves. • When supply chain is viewed as a 'non-core' activity. IGD wanted to gauge the level degree of supply chain outsourcing that occurs across international markets.that is to say. some organisations are simplifying their logistics operations by harmonising contracts and reducing the number of operators used. or is it outsourced to a third-party logistics company? • What volume of goods is managed in-house or via the third-party company? • Do you employ a lead logistics provider .

sometimes resulting in the rationalisation of production and storage activities. compared to 40% managed internally by the company.com/supplychain © IGD 2006 . it often represents a significant part of the company’s total volume throughput. and so it would be difficult to separate the management of these two parts of the chain. Source: IGD Research. more volume is outsourced and transported by third-party logistics companies. and that when warehouse management is outsourced. 2006 Transport In contrast. • For some retailers. 32 www. Implications As companies review their supply chain operations. It is due to this traditional view of the role of logistics firms that many of the sector's leading logistics companies are now focusing on broadening their service offering with a range of valueadd activities and end-to-end management. this trend could also be due to the fact that warehousing is often integrated into the production facility for many manufacturers. this will mean more warehousing activities are outsourced. pick and distribution facilities away from the main production plants. compared to only 30% of volumes being managed internally on companies' own-fleets. When transport is outsourced to a specialist company.igd. International Supply Chain Barometer Managing International Supply Chains Warehousing In terms of warehousing activities. In addition to legacy practices. this may well mean locating centralised storage. • For suppliers. increasing the potential to outsource to a third party company.1. the picture for transport activities is somewhat different. 89% of responses said that this represented 50% or more of their total volumes. as they focus on in-store execution and product sourcing initiatives. These results show that outsourcing is indeed highly prevalent within the warehousing part of the supply chain. Of those 60% of companies that outsource their warehousing. At nearly 70% of replies. These figures confirm the pivotal role of specialist logistics firms in moving inventory within the food and grocery sector. • The level of integration of third-party logistics companies within the international supply chain is therefore expected to increase over time. Of the 70% of companies that outsource their transport movements. 60% of responses showed that warehousing was outsourced to third party providers. whilst 30% said that this represented all of their warehousing volumes. over 56% said that all of their volume was outsourced.With rising cost pressures it is likely that an increasing number of companies will view warehousing as a 'non-core' activity. there are still a large number of companies who still manage their warehousing internally (40% of replies). In contrast. the client delegates all management of the movement of goods. or a strategic decision to control all parts of the chain.

and 'in-store' replenishment initiatives.igd.This strategy presents growth opportunities in being able to offer integrated solutions. these companies are aiming to reduce the complexity and challenges of global sourcing and international freight management. thus concentrating on large geographical areas and the inter-linkages. Third party logistics service providers. Some of the leading players in outsourced logistics. and simplifying the management of the supply chain for their customers. Back down the chain. the larger logistics firms are moving up the chain towards the store environment. aim to get even closer to their customers. Some are even considering the prospects of joint inventory ownership and gain-share arrangements to drive further efficiencies and build stronger business partnerships. Lead Logistics Provider by Supply Chain Management Structure Regional Management National Management International Management • Baylis x 2 • Suederelbe in Germany • "Depends on the country • • • • in which the company operates" Frans Maas in Europe Exel Danzer A local co-operative of entrepreneurs (Hungary) ND Logistics in Europe • Stiller Osbourne Logistics in the UK • CERT in the UK • Celsius First in the UK x 2 • ND Logistics in Czech Republic x 2 • • • • • • Exel DHL in the USA Global Services DHL Maersk Youngs Transport • Baylis in the UK • TNT in the UK • Bougheys in the UK Source: IGD Research.com/supplychain 33 . in order to see if there is any correlation between the way the supply chain is managed (regionally. For those companies in IGD's survey who do have a lead logistics provider. ensuring they remain focused on customer requirements. such as Exel. Expectations and demand for quality integrated logistics services are just as high in more developing markets. and designing and managing more fully-integrated supply chain solutions. International Supply Chain Barometer Lead Logistics Providers Aiming to become 'lead logistics providers' with integrated technology solutions. 2006 © IGD 2006 www. with both labelling and packing. the responses have been split by supply chain management structure. nationally or internationally) and the logistics company employed to manage the flow of goods throughout the supply chain.Managing International Supply Chains 1. therefore. have created organisational structures that are regionally-based. and because of the heightened challenges supply chain professionals and Third party logistics service providers will be even more focused on driving efficiencies. reducing costs.

and this is managed in-house. Arla Foods often delivers direct to store. or by a subcontractor. • For example. 2006 Implications In an aim to drive scale efficiencies across markets through improved visibility of logistics costs. • A clearer view of costs and comparable key performance indicators will aide companies understand their real 'cost-to-serve'. International Supply Chain Barometer Managing International Supply Chains Overall. companies often do not have a lead logistics provider. Source: IGD Research. the vast majority of these are managed ex-Factory Gate. many international companies are now stream-lining their operations and choosing to reduce the number of divergent contracts and/or the number of logistics operators in the chain. 34 www.and can also make inter-company comparison difficult. and so the transport element is managed by the retailer. which manages its supply chain nationally. Source: IGD Research. which includes.com/supplychain © IGD 2006 . the variety of contracts can also add complexity into the supply chain which in itself can increase costs . then there will be greater insight into the real costs that this service will create for the supplying company. However. the international logistics giants of DHL. this can help in the development of service-based pricing initiatives. Whilst benefiting from local knowledge. for deliveries that will go into retailer distribution centres (RDCs).1. Through international integration and consolidation. flexibility. despite over 40% of responses stating that the supply chain was managed at an international level. but to a wholly-owned subsidiary of the Müller Group called Culina Logistics. either by their own fleet. outsources all of their warehousing and transport logistics.This means that organisations currently outsource their international supply chains to a variety of logistics operators. perhaps unsurprisingly. if a retailer requires specific value-add services (like labelling). and for manufacturers. • For secondary deliveries. there is a concentration of companies being cited. IGD believes that this trend can only increase as both suppliers and retailers continue to internationalise their operations and seek global supply chain solutions. 2006 When a lead logistics provider is used. these companies have been at the forefront of moves to offer end-to-end solutions. and sometimes cheaper rates. DHL-Exel being a prime example. Exel and Maersk.igd. thus helping to protect profitability. Points of difference: • Müller Dairy.

4 Supply Chain Challenges Key Points to Note • Demand Planning & Forecasting. v.4. 2006 © IGD 2006 www. Demand Planning & Forecasting Retail Packaging New Product Introductions Fuel Costs Availability Multi-Modal Distribution Labour Shortages or constraints Shrinkage Other Percentage of Replies 72% 54% 54% 48% 44% 24% 22% 15% 9% Source: IGD Research. but the companies surveyed found the below issues to be of particular relevance. In order to understand the challenges that international supply chains are facing. iv. • Retail Ready Packaging continues to be a hot industry topic. viii. and the need for improved management information. Retail Packaging. • Other key issues include understanding true cost-to-serve. and 2006 will see the challenges and benefits being further debated.Managing International Supply Chains 1. ix. and New Product Introductions are the top three supply chain challenges in IGD's international supply chain survey. vii.1 What Key Challenges are Facing Supply Chain in Your Area of Operation? Key Supply Challenges Challenges Facing Supply Chain i. • Collaborative planning between manufacturers and retailers can bring solid business improvements. IGD's international survey asked companies to highlight: • their main supply chain issues • whether these differed by international market • and also to share their main top three supply chain projects Whether there are any supply chain issues that have truly global implications can be debated. increasing fuel costs. iii. ii. International Supply Chain Barometer 1.igd.com/supplychain 35 . particularly when considering the in-store availability challenge. vi. 1.

service levels. Specifically.1.igd. the ability to accurately plan and forecast demand is the number one issue for manufacturers within the food and grocery industry. This often translates into huge peaks and troughs in demand placed further back into the supply chain. Demand Planning and Forecasting Clearly. Improvements in this area would help ensure production targets.termed the ‘bull-whip effect’ . Collaboration IGD believes that integrated demand planning processes and tools will not only aid internal operations. and how through working together the supplier and retailer can unlock both sales growth and improved business relationships. with particular focus on in-store implementation and product availability. the misreceipt of deliveries. shrinkage and write-off costs for unusable items. Taking a more holistic view of the supply chain can facilitate improved planning and forecasting. In this way. with 72% of replies. • Merchandisers should know that the over-ordering of products leads to greater volumes of sale discount or mark-downs. can improve relationships between supply chain partners. the biggest supply chain challenge facing the international supply chain. With two thirds of respondents being FMCG suppliers. yet lower stocks of what you do want to sell. replenishment ordering in full truck-loads. This pressure on space and handling efficiencies subsequently affects productivity and shrinkage. then successful event and promotional planning and forecasting can make a real difference to the success of any initiative. • Sales managers should know that over-forecasting brings additional stocks into the business. and with promotions being increasingly used as a key competitive tool. effective demand planning for short shelf-life products in highly promotion-led categories proves particularly challenging. incorrect demand forecasting and demand can adversely affect sales targets and profitability. and poor in-store implementation and compliance can all distort real shopper demand. and hence increased storage.com/supplychain © IGD 2006 .can have knock-on effects in the supply chain. International Supply Chain Barometer Managing International Supply Chains i. is demand planning and forecasting. • Whilst supplier managers should know that the over-production of one product can lead to higher stocks of what you do not want to sell. Perhaps even more importantly. Whilst demand at the retailer’s till may be relatively constant. additional ordering due to unreliable supply. and availability targets are consistently met. Amplification of changes in demand . This can come about though closer working relationships and a greater understanding of the impact of one decision on other parts of the chain. minimum batch/order quantities. This demand fluctuation can create uncertainty in the chain. which can impact on capacity and inventory levels. 36 www. but also when used collaboratively. the following case-study illustrates an end-to-end supply chain initiative.

igd. International Supply Chain Barometer Case Study . measures and results to the other project teams. with experience of running similar programmes in the UK. An ambitious pace of business improvement and personal development was maintained through regular reporting back on progress. 2006 Phase 1: Measure and Understand On-shelf availability (OSA) needs to be measured and analysed to avoid action – or non-action . organised and facilitated the end-to-end project.being based on myth or gut-feel alone.com/supplychain 37 . if they had not had the prospect of having to report their findings to other project teams.Superquinn & Coca-Cola HBC (Ireland) ‘Availability for Impulse . The first set of data gathered by Superquinn and Coca-Cola HBC showed good availability. sponsor directors and IGD facilitators. At this point. IGD. company sponsor directors and IGD facilitators. Category Management. Store Management and Commercial. © IGD 2006 www. Retailer-Supplier pairings were pulled ‘out of the hat’ and cross-functional teams were put together from Logistics. The Learning Programme Project Plan Web-based reference material On-Boarding meeting 01/02/05 Measure and understand 1 Priority meeting 01/03/05 Measure and understand 2 Progress meeting 30/03/05 Redesign and pilot Progress meeting 02/06/05 Roll-out and sustain Evaluation meeting 27/07/05 Jan Feb Mar Apr May Jun Jul Source: IGD Research.Managing International Supply Chains 1. there was a high likelihood that Superquinn and Coca-Cola HBC could have walked away from the project after this first analysis. and across four locations gave 98% OSA.Collaborating to deliver 30% growth in category sales’ Superquinn and Coca-Cola HBC were among six companies brought together by ECR Ireland to work at improving on-shelf availability in the Republic of Ireland. At first internal ‘Not-Available-For-Sale’ audits completed three times a day. over a twoweek period. but major opportunities came to light when more thorough analysis was undertaken.

” The definition of OSA included “all placements for each key consumer occasion: Main Shop. On the Go and With Food. the Impulse range was rationalised to ensure listing of the top selling SKUs.com/supplychain © IGD 2006 . maximise availability and increase consumer satisfaction.g. motivate others.” Further analysis revealed inconsistencies in the number of SKU’s listed per store (e.Whilst this revealed a ‘Take Home’ OSA of 94% and a ‘Multi-packs’ OSA of 94%. achieve early wins. energy and sports.’ Performance Measurement The success of the project will be measured against the following criteria: • • • • • Impulse mix within category Planogram compliance DC stock holding On-Shelf Availability Impulse category sales growth from 5% to 11% from 61% to 95% down to 10 days from 77% to 98% by 25% Phase 2: Redesign and Pilot The emphasis here was to develop and test solutions locally. • Assets were audited and planograms developed accordingly.igd. Objective ‘To develop and implement a comprehensive impulse activation plan which will maximise On Shelf Availability for each of the core consumer occasions. and learn by doing: • Six test stores were selected. Project Definitions • The team defined Impulse as “chilled immediate consumption beverages across • carbonated soft drink. water. • Across the trial stores. ranging from 8 to 49) with some stores not stocking any of the top ten lines due to space allocation and lack of planogram compliance. International Supply Chain Barometer Managing International Supply Chains Results from initial analysis Store EPOS sales by SKU by day were then tracked for two weeks using lost sales analysis.1. • An ‘Impulse Planogram Champion’ was identified in each store to raise any range and planogram compliance issues with head office and suppliers. juice. The project team at Superquinn and Coca-Cola decided to focus on Impulse because of the very high level of lost sales and their high margin. 38 www. representing a cross-section of Superquinn shopper occasion mixes. Superquinn had given the category lower than average category space and consequently had the lowest Impulse mix of business versus their competitors. ‘Impulse’ lines and ‘New Items’ recorded an OSA of only 80% and 71% respectively! Independent audits across thirteen stores and the top twenty Impulse SKUs gave an even lower Impulse OSA of 77%.

Superquinn Stores Source: IGD Research 2006 Space allocated to Impulse Soft Drinks across all stores was reviewed with each Store Manager. This increased the opportunity to purchase a chilled soft drink in store ‘With Food’ and increase basket size for consumers purchasing food-to-go. and near the kiosk area. Assets were also placed in the ‘On The Go’ shopping path. International Supply Chain Barometer • ‘Impulse Beverage Centres’ were created as part of the Main Shop pattern. In-Store Equipment On The Go Sandwich Unit In-Store Locations On The Go Hot Food Counter Unit Checkouts Source: IGD Research Kiosk © IGD 2006 www. The alternative was to design ideal solutions for Superquinn. but wait until 2006 for a return.com/supplychain 39 .Managing International Supply Chains 1. All suppliers were involved so all available assets from the total industry could be employed to generate early returns in 2005. for example near delicatessen counters. put assets on order.igd. at the checkouts.

rather than waiting for an ideal solution. The above work has grown the impulse category by 30% in Superquinn. These fundamentals continue to be delivered to all stores to maximise availability.1. 2006 40 www. Trial stores over-performed due to increased focus.igd. Additional opportunities identified and dialogue progressing. Key Learnings Beyond the improved business results already summarised.com/supplychain © IGD 2006 . There was a proved direct correlation between planogram compliance and increased sales. The trial stores achieved 100% availability. Stockholding has been adversely impacted. communication and education. Planogram compliance audits were undertaken every six weeks. the Superquinn and CocaCola HBC team highlighted the following benefits from engaging in the structured collaborative learning programme: • • • • • • Open and honest dialogue and great cross-company team working. Bias for action: by piloting a solution quickly to generate immediate wins. Source: IGD Research.sales’ and increased consumer satisfaction. All Shops achieved OSA above 92%. which reduced ‘off. especially on new lines. by a move to full pallet ordering. International Supply Chain Barometer Managing International Supply Chains Phase 3: Roll-out and Sustain The approach taken in the trial stores and the lessons learnt were rolled out to all stores. Attention is to be paid to adjusting thresholds for ordering full pallet quantities and changing to layer ordering for new lines. Results versus Target • • • • • Impulse mix within category Planogram compliance DC stock holding On-Shelf Availability Impulse category sales growth from 5% to 11% from 61% to 95% down to 10 days from 77% to 98% by 25% 10% 85% WIP 93% 30% Source: IGD Research The range was reduced by 100% and aligned with the market coverage. however. OSA audits every eight weeks and range reviews every twelve weeks. This is 50% higher than the category growth across all supermarkets. Better understanding of each business at head office and local level. Whole process perspective of product demand and supply chain. Discovering quick and simple wins that would only be found through dialogue.

Recent work within ECR UK on the subject of availability and new product introductions – in ‘Availability 2005 – Closer to the Shelf’ highlighted the need for joint retailer.igd.Managing International Supply Chains 1. iii. as can the level of detail of the forecast. Carrefour and Metro have also started to make moves in this area. as some of the major international and market leading retailers focus on ways to streamline the in-store replenishment process. and that new products are reaching the shelf in-time. and especially the need to review the success of the implementation. After helping define the term RRP. Retail packaging is not only about the in-store experience though. ECR UK is now working on developing guidelines and standards for branding and symbols. In recent IGD research. ahead of shorter queues and products being easier to find (IGD Research. and at the right distribution. and equally received 54% of survey replies. with both Tesco and Unilever at the leading-edge of this initiative in the UK. to help ensure co-ordination between various retailer demands. better on-shelf availability is number one on the wish lists of shoppers. International Supply Chain Barometer ii.com/supplychain 41 . amongst other attributes. © IGD 2006 www. or churning. 2006 RRP transit solutions Tesco ECR UK published its first Blue Book on Retail Ready Packaging (RRP) entitled ‘Retail Ready Packaging – Getting Started on the RRP Journey’ in July 2005. With up to a third of products changing. retail packaging continues to be a ‘top of mind’ supply chain issue for the food and grocery sector.manufacturer business planning. Retail Packaging With 54% of replies. it is imperative for organisations to ensure that the associated investment is adding shopper value. and in the right quantities.The level of discussion and agreement between retailers and suppliers on an NPI forecast can vary considerably. RRP Applications Aldi Source: IGD Research. and organisations are also investigating how they can influence and improve the flow of product and packaging solutions through the distribution network. At a European level. 2005). and ECR Europe has formed a Workgroup to co-ordinate the various national initiatives. and the ability of international manufacturers to respond accordingly. New Product Introductions New product introductions (NPI) also prove to be a key supply chain challenge. every single year.

Fuel Over the last year in particular. Cost-to-Serve Initiatives The difficulty in attributing costs to a varied product portfolio. deliveries & merchandising Review (KPIs. some companies mention the challenges of discontinued lines. both large and small. so that the account’s true profitability can be accurately accounted and reflected in further commercial discussions. Almost 50% of survey replies cited fuel costs as a supply chain issue for their organisation. v. exceptions) Source: ECR UK. It is important for suppliers to understand the real costs associated with servicing a given customer. especially full-pallet picking versus layer or single-picking. ECR UK advised that a clear exit strategy for end-of-line products can be highly influential on the success of the implementation of the new line. In addition to specific product attributes. When combined with skilled labour shortages in some markets.com/supplychain © IGD 2006 . iv. the increases in the price of fuel. IGD maintains that initiatives which focus on even greater distribution efficiencies will become increasingly important. and whether the supplier takes the costs. the quantity and frequency of order replenishment for different retail customers can have a significant effect on supplier operational costs.igd. including local versus central decision-making. whether mark down is prior or post NPI launch. There are many options that need to be considered for an effective ‘phase-out’ process. or these are shared with the retailer. due to capacity issues and security of supply.1. have been cited as an area that continues to challenges suppliers. 2005 Often linked to the issues associated with NPI. International Supply Chain Barometer Managing International Supply Chains Process Flow at Each Stage of Implementing NPI to Store Phase Out Execution Mark down & clearance Planning Aligning Retailer & Supplier Join Objectives Forecasting Developed for both phase out of old product and phase in NPI Phase in Execution order. It is expected that fuel costs will continue to be a burden on organisations for the foreseeable future. have increased the costs of doing business for many organisations. 42 www. In this way.

the role of the logistics team in providing information should not be underestimated. as opposed to real delivery errors. As supply chain visibility improves. Internal Relationship Management It is important for organisations to create the right internal relationships. so that action can be taken when required.com/supplychain 43 . in addition to the cleanliness of the vehicle and the available space. the reliability of the transport carrier in being able to meet their designated delivery window is also a key performance indicator that should be readily monitored and managed by the warehouse teams. is often considered the single greatest waste in the transport sector. vii. but believes that these discrepancies are due to mis-counting at the receiving depot. ‘operational capability’ can only come about if a business is managed as a joined-up set of supply chain processes. whether at collection or delivery points. viii Shrinkage Whilst supply chain shrinkage as a key supply chain issue only accounts for 15% of survey replies. Management Information The ability to transform data into business critical management information in a realtime environment also continues to challenge some organisations. in a timely fashion. the logistics operator can also provide information on the supplier’s loading performance. As penned by R. International Supply Chain Barometer vi. but also the shopper. In addition to information on the geographical flows. vehicles should not be . particularly when outsourced to a third-party logistics provider. and the ultimate consequences for the external customer. the optimisation of payload (vehicle fill-rates). concentrating on their own goals. and more data becomes available. other supplier companies quote high levels of claims from retailers for over and under deliveries into their receiving depots. costs per square metre. Queuing. Conversely. © IGD 2006 www. through both physical integration and system tools. After all. The supplier often finds it is unable to prove the contrary.Managing International Supply Chains 1. Boughton in 2003. and assistance with identifying inefficient or non-costeffective deliveries. At the operational level. both within departments and cross-functionally. Within this view. and the receiving retail warehouse performance. There are even examples where waiting time is a key performance indicator for staff reward. it is important for companies to be able to access and interpret that information quickly and simply. in strategic terms. viewed as “low-cost warehousing on wheels” and so reductions in delays and queuing should be of primary focus for supply chain managers. ignore the impact they have on the efficiency of their internal customers within their own organisation. departments run as silos. in order to ensure the organisation is truly focused on supplying not only the customer.igd.

and mis-counting at the retailer depot. this type of loss would be considered as shrinkage. clearer paperwork. Solutions could include improved retail packaging. or even rounded order quantities. International Supply Chain Barometer Managing International Supply Chains In ECR terms. 2004’). For further details of ECR UK activities. and could be tackled in a pro-active way by ‘walking the chain’ and identifying process gaps. so that full layers and/or full pallets are delivered. 44 www. and free downloads of any Blue Book best practice guide. see (www.igd. (source: ‘Shrinkage in Europe: A Survey of stock loss in the FMCG sector.com/supplychain © IGD 2006 . ECR Europe’s survey into supply chain stock loss in 2004 cites ‘process failure’ as the single largest reason for shrinkage in the FMCG sector.igd.1.com/ecr). thus reducing the opportunity for mispicking at the supplier.

Supply Chain Optimisation 2.igd. Companies are responding through a variety of supply chain initiatives to help maintain total costs. service levels. price sensitivity and cost pressures. • Inter-modal activity is on the increase across Europe in particular.Managing International Supply Chains 2. and leading-edge technologies to create a significant business improvement tool-kit.There is also a growing trend for short-distance sea-shipping. • Factory-gate collections and cross-docking practices are becoming more widespread. others are selling off their warehousing assets.com/supplychain 45 . as retailers in particular understand the real benefits of increased inbound cost visibility. Supply Chain Optimisation Summary • Pressures for greater supply chain optimisation include global sourcing. © IGD 2006 www. that will sometimes service several countries from one single location. as more and more companies look to move freight back onto the rail and canal networks. increased promotional activity. now combine with cross-docking. Logistics service providers want to capitalise on improvements in these linkages to offer full end-to-end supply chain solutions. • Transport costs account for a significant proportion of total supply chain costs. and these are being challenged across many international markets by fuel cost increases. and then leasing them back. such as tariff management. fullload deliveries and competitive tendering. • Whilst some companies are moving into large-scale centralised distribution parks. availability and accurate demand planning. road tolls and a lack of investment in transport infrastructure. and the opportunities for integrating transport fleets. but there are still a number of challenges that continue to limit widespread adoption. consolidation. • Traditional methods of driving logistics efficiencies. Other new technologies like RFID/EPC and the benefits of Global Data Synchronisation remain industry talking points. legislative changes. • Warehouse automation continues to prove that technology can bring significant operational benefits for some companies. thereby reducing capital commitments and injecting cash into the business.

com/supplychain © IGD 2006 . companies are now employing a catalogue of warehousing and transport solutions sets. Solution Sets Then Now • • • • • • Tariff Management Full Load deliveries Safety Stocks More Frequent Deliveries Routing efficiencies Competitive Tendering • • • • • • Centralised Distribution Hubs Warehousing Sale & Lease-Back Consolidation & Shared User Initiatives Vendor-Managed Inventory Cross-Docking & Factory-Gate collections Increased use of Technology Source: IGD Research. in the continued quest for end-to-end international supply chain efficiencies. availability and the need to accurately plan and forecast demand. it is delivering the best service levels at an efficient cost.2. there are concerns over the environmental impact of a growing number of trucks on already congested road networks. But a number of factors have been impacting on the supply chain. 46 www. holding safety stocks and implementing operational excellence initiatives. and onward into stores. Pressures for Greater Supply Chain Efficiency More Promotions Congestion Costs Service Levels Availability Demand Planning Global Sourcing & Longer Lead-Times Retail Packaging Price Sensitivity Skilled Labour Shortages Fuel Costs New Product Introductions Source: IGD Research. This has often been achieved through regularly tendering for new tariffs. increasing fuel costs. 2006 One of the responses to these pressures has been a trend for more frequent deliveries from suppliers to retailers. reduced order sizes and increased picking activities. 2006 Subsequently. and heightened price-competition in the marketplace. service. Supply Chain Optimisation Managing International Supply Chains When the supply chain is performing well. In addition. But this solution also impacts on costs in terms of more transport.igd. in addition to the more traditional methods. adding extra complexity and increasing pressure on costs. delivering full loads. skilled-labour shortages.

vehicle routing. to distribute across France. distribution centralisation. there has equally been a growth in the use of centralised distribution hubs. inventory reduction. inventory consolidation and shared-user initiatives are increasingly common particularly for relatively slow-moving ambient product lines. inventory. Due for completion in three years it is estimated to be the size of approximately 350 football pitches. systems investments.000 square metres of space. and more than one location can be serviced. As such. the food manufacturer.Managing International Supply Chains 2.igd. time. both retailers and suppliers are rationalising their distribution networks and driving stocks through fewer.Distribution Parks The world's largest provider of larger warehouse facilities . Key Focus . state-of-the art large-scale warehousing facilities.com/supplychain 47 . and then leasing facilities back from the new owners. location will be a major consideration in supply chain business strategy. Solutions include: consolidation. where return vehicle trips can be made in one day. Supply Chain Optimisation 2. but often larger. and administrative costs. 2006 © IGD 2006 www. and improve service levels. there have been high levels of focus on reducing warehousing space and facilities.1. fuel. In terms of warehousing. • Businesses have an overall aim to reduce inventory.1 Centralised Distribution Hubs The location of warehousing facilities impacts considerably on costs.1 Optimisation Through Warehousing Key Points to Note • There is a growing trend for new. and staffing. some of which will serve several countries. The Chanteloup industrial park at MoissyCramayel on the outskirts of Paris is a prime example. In an increasingly-complex business environment. inventory levels. Source: IGD Research. aiming to maintain both flexibility and customer-focused performance. 2. warehouses. Despite a growing preference for more regional distribution centres. One warehouse is already expected to be used by Danone. • There have been many recent reports of companies around the world selling off their warehousing facilities to generate additional cash. it will house eleven warehouses offering a total of 280.US-based ProLogis has been at the forefront of these trends. which will sometimes service entire countries from a single geographic location. and financial tools to reduce fixed capital investment.

but these are fashion-driven and so there are not so many slow-moving lines. In response to this market.000 skus. Despite a highly seasonal business. the products are imported largely from the Far East. landscaping and even the collection and re-use of rainwater. centralised parcel deliveries? 48 www. Gain the best of decentralised and centralised distribution by creating distribution clusters based on cultural and market similarities. Case-Study . The Choice The choice of network structure can seem relatively simple: Decentralised distribution in each key market Advantages Quicker lead-times for bulkier lines. and in urban Japan. the options are much more complex: • Will all warehouses carry the entire sku range. and these could be in terms of newly-planted woodland.com/supplychain © IGD 2006 . and logistics costs are sensitive to roadtransport variables. for example. In reality. gaining planning permission for such large developments is not always a simple process. The challenge of finding appropriate locations for warehouse facilities in the denselypopulated urban centres has led companies like ProLogis to provide innovative solutions. there are less than 2. where volumes increase 50% in 90 days towards the end-of-year celebrations. pallet management and the holiday seasons. The environmental credentials of any such development are therefore of high importance.igd. Fisher-Price and Scrabble. delivery windows. defining an outsourcing strategy. in terms of: order types and drop sizes.2.Mattel. the business does vary by country. and flexibility in delivery. greater control and enables business focus. Supply Chain Optimisation Managing International Supply Chains Of course. European Distribution The Business Mattel is the world's number one toy manufacturer. solar panels on the roofs. with brands such as Barbie. customised to each market needs. clearer accountability. As for the product itself. lead-times. by reducing the number of distribution centres. Matchbox. Regional distribution Centralised distribution across the whole of Europe Greater inventory and fixed costs synergies. which impacts on lead-times.g. both European and Asian production? • Will warehouses have specific functions e. particularly when using green-field sites. urban warehouses can be built several storeys high. returns policies. Mattel has restructured its logistics network. whilst maintaining a European-level logistics process.

Oss (Benelux & Scandinavia . aligning business processes. and the management of the DC's and transport. Benefits of Regionalisation • Control and transparency in cost. strategic planning. reducing the number of distribution locations from circa 15 to only four sites with some platforms in Eastern Europe. full load ratios. Mattel Toys Europe moved from a decentralised supply chain network to a regional supply chain network. including service procurement. as the change process can be challenging • Speed of implementation is important. The Results Between 1997 and 2000.igd. parcel vs. The four key facilities. In terms of the wider supply chain. lead-time requirements.Mattel). where the base-case scenario is validated by operational specialists. where many business processes in the past were all managed at a local level. Stock is committed to one country.Managing International Supply Chains 2.Norbert Dentrassangle). IT support.Norbert Dentrassangle). creating and organising a pan-European team. and having European-level systems and KPI's Do not underestimate the impact of seasonal volume increases. Company culture will also play a part. but about multicultural communication. which service other regions of Europe include: Daventry (UK Wincanton). service and cash (inventory reductions) • A focus on investment in modern distribution centres with new technology • An ability to attract talent into the organisation • Allows the business to concentrate on its core activities Mattel Learnings • KPI's and consolidated processes are needed before the change • It is important to select the right team of people and business partners. and Ollegio (Italy . so 'what if' scenarios are • • • • important Consider the benefits of outsourcing It is not only about closing and opening distribution centres. these moved to more regional/global management. and can impact on service levels In order to ensure a cohesive plan. as the priorities change • Assumptions will change throughout the project. whilst forecasting and sales administration moved to local management with global and regional guidelines. and tolerance to crisis and contingency options (e.g. 2006 © IGD 2006 www. including centre of gravity.g. and to ensure that people do not renegade on the original objectives of the project Source: Mattel. 2005/IGD Research. fire and labour strike). centralised slow-moving goods warehouses? The final choice will be driven by the nature of the business. Supply Chain Optimisation • Will inventory be split based on sales velocity e. It is important to note that the inventories were not merged and are not shared. which can require temporary warehousing solutions.com/supplychain 49 . Lyon (France & Spain and Portugal . it is important to have a structured approach.

The aim of this initiative is to minimise costs. As part of a re-structuring programme designed to rescue one of Europe's largest department-store chains and eliminate the company's debt levels in 2006. through working collaboratively. and can impact on overall profitability measures.2 Warehouse 'Sale and Lease-Back' Schemes Whilst sale and lease-back schemes for retail stores are common place. Woolworths is interested in the attracting the lowest possible rent from the future owner (s). It has been announced that the sale will allow a cut in net debt of €188m and have a positive impact on profit. reduce the number of less-than-full truck loads being delivered into a particular retailer's warehouse (thus improving productivity). whilst improving service levels to stores and gaining better on-shelf availability for the shopper.igd.5m pre-tax. m.3bn in September 2005.000 sq. Source: IGD Research. Germany Karstadt has announced plans to sell more than €400m worth of real estate. stocks into one shared warehouse. In this way.Sale and Lease-Back Casino Groupe. Key Focus . France Casino Groupe in France has announced plans to sell 13 warehouses. Casino's wholly-owned logistics company. particularly in high-cost property markets. where product from several manufacturers is housed at the same facility. this has been a growing trend within supply chain. to a real estate business for €201. Once the deal is completed during the first-half of 2006. and then leasing them back off the holding company. Karstadt has been using sale and lease-back initiatives as a key mechanism in combating its difficulties.com/supplychain © IGD 2006 . in addition to the sale of nearly half of its stores. Woolworths.The process involves companies selling their portfolio of property assets. whilst maintaining operational control. not least by reducing debt. Karstadt. The enthusiasm for this type of collaboration in the primary network is born from a desire to reduce total inventory levels. the company hopes to have already reduced its debt to €2. which can represent significant value. or pooling. Australia Woolworths has been reported as selling 11 large-scale distribution facilities worth approximately $850m. consisting mainly of distribution centres. This allows companies to release capital back into the core business to fund significant business improvement and change initiatives. covering a total of 418. and not necessarily maximise the selling price.3 Consolidation and Shared-User Initiatives Another increasingly common trend has been the growth in the number of shared-user warehouse schemes. 2006 2.1.1.2.8bn from €4. twelve of the warehouses are being leased back by Easydis. Supply Chain Optimisation Managing International Supply Chains 2. a number of companies have achieved significant business benefits from consolidating. 50 www. By the end of 2005.

Discount and Convenience. In this way. which incorporates both primary supplier networks and secondary store deliveries. Supermarket. with over 11. Carrefour seeks to create value by maximising shelf availability. bringing business process improvements. and is the number two retailer worldwide.Carrefour. Poland and China (see Chapter 3). • The speed to shelf improved by three to six days Roll Out (from 2005 onwards) • Deployment to all RDC's and plans to add another supplier into the pooling process © IGD 2006 www. 'Pooling' The Business Carrefour is the number one retailer in France and Europe. Context Two suppliers (Vania and Henkel) are using the same pre-existing warehouse. Supply Chain Optimisation Case Study .5 times per week. An agreement on the pallet split by truck for each Regional Distribution Centre (RDC).com/supplychain 51 . moving to two deliveries per week. of products has offered Carrefour the greatest opportunities for increased supply chain efficiencies. and having a number of methods of implementation. By moving from a stock management strategy to a flow management strategy. Vania delivered once every two weeks and Henkel 1.igd. having a positive impact on transport and unloading costs • There was a higher delivery frequency. which is managed by TNT.Managing International Supply Chains 2. or Pooling. and any change is communicated and agreed by email between the two suppliers. the Consolidation. including France. Creating value along the total chain.600 stores in 31 countries across various formats: Hypermarket. Cash & Carry. pooling has been implemented by Carrefour in a number of countries. France. Pilot Phase Benefits (across two RDC's in April 2004 and 3 more RDC's in July 2004): • Service levels were above 99% and better than the average • Stock levels reduced by 20% • Full truck load rate moved from 79% to 98%. Process Deliveries are combined on trucks going into Carrefour regional distribution centres. Aim To reduce supply chain costs to enhance the product price and improve availability for the shopper. and so deliveries were not full truck loads and there was too much inventory in the supply chain.

Supply Chain Optimisation Managing International Supply Chains Carrefour's Key Learnings on Pooling: 1. 3.Gruppo PAM and Number 1 Logistics Group. and an element of winlose for the supplier. Consolidation can offer many efficiency gains. including PAM. has 30 selfmanaged sites. an Italian retailer. Local resistance from suppliers may require some time in negotiations.com/supplychain © IGD 2006 . Oct. has over 850 outlets with a turnover of over €3. where both commercial and supply chain teams need to have knowledge of the process and the benefits. with the top five retailers having only 30% of the market. and generated a turnover of €277m in 2004. supplier and logistics provider). and the distribution network is less developed. For all parties. supplier consolidation initiatives involve all supply chain parties (retailer. The pooling of suppliers can bring positive results in various markets. Context Italy is a highly-fragmented retail market.7bn. specialising in shelf-life management. and over 600 distribution centres across the country. Number 1 Logistics Group is a leader in the food & grocery logistics market. and operates across various formats: Hypermarket.2.igd. there are longer-term benefits to be gained. Franchising and Discount. Source: Carrefour. 4. and that the buying team is fully on-board. where higher concentration is seen by 50% of retailers using only three buying groups. Panorama and iN's Mercato. 52 www. the importance of the planning and preparation phase of the initiative should not be under-estimated. Supéral. 2. traceability and recall processes. The lower power-base of the retailer contrasts markedly with the vendors. and the logistics service provider plays a key role in facilitating the implementation and process management. 5. Although there can be an initial reduction in revenues for the service provider. 2006 Case Study. compared to over 70% in France. including reductions in supply chain inventory. It can be somewhat easier to implement in emerging markets. In this way. Italy The Businesses Gruppo PAM. Supermarket. from mature markets (France) through to new and emerging markets (Poland and China). and enhancing shopper satisfaction through improving on-shelf availability. because lower volumes allow for changes in process. Pooling can take longer to develop and implement in more mature markets. 2005/IGD Research. Internal organisational collaboration is a pre-requisite for this type of initiative. driving down the full supply chain costs for the supplier and retailer. Germany and the UK.

• An Open-book approach between Number 1 and PAM. Number 1 now rolling out to over 30 retailer DC's. with on-time deliveries improving from 93% to 98%. with benefit share of transport savings.com/supplychain 53 . with a pallet exchange system.has been at the forefront of a consolidation initiative in Italy through their 'efficient delivery system' called SYNCHRO club. reduce costs. • A fast delivery lane with fixed delivery windows. if possible. and improve service levels by changing the replenishment method into the retailer DC's. Florence and Rome. logistics firm Number 1 Logistics Group . 2005 • • • • • Benefits Service-level improvements.igd. Stronger relationships between supply chain partners.Managing International Supply Chains 2. Source: Number 1 Logistics Group. Process • 4 PAM DC's . Aim To reduce the transport flows. The hub in Milan holds ten suppliers. and two deliveries per week for the two largest sites. with one delivery per week for the two smallest warehouses. Inbound traffic from Number 1 into PAM's distribution centres has halved.a spin-off from Barilla . through consolidating suppliers and treating them as one single 'macro' supplier. Source: Gruppo PAM/Number 1 Logistics. but is based on consolidated direct deliveries into the retailer distribution centres through a central warehouse managed by Number 1 Logistics Group. • An alignment. of all supplier delivery dates into the retailer DC. but with no change in delivery frequency or required quantities. Milan. 2005/IGD Research. Emergency deliveries are still allowed. Supply Chain Optimisation In response to these dynamics and the challenges of less-than-full truck deliveries. 2006 © IGD 2006 www.Venice. This is not a Vendor-Managed Inventory (VMI) initiative. Average transport cost saving of 12% (range 5% to 15%).

and a twostep process. In order to choose the right partner. the products should be complementary (but not necessarily direct competitors). Although this initiative is helping drive supply chain efficiencies.Reckitt Benckiser France. 2006 54 www.com/supplychain © IGD 2006 . Source: Reckitt Benckiser.2. through two manufacturers delivering into retailer distribution centres together. and this has shown that overall supply chain costs can be at least maintained. Shared-User Networks Reckitt Benckiser has been carrying out multi-pick distribution in France. moving from partial volume transfer to full transfer. Reckitt Benckiser has taken the collaborative approach one step further through a shared-user site initiative. existing relationships need to be strong. overall supply chain costs were still viewed as increasing. 2005/IGD Research. and there needs to be an over-arching desire to be pro-active. There is also the added administrative workload and complexity of multi-pick. engagement over several years. Subsequently. Supply Chain Optimisation Managing International Supply Chains Key Focus . The company believes that any decision to pool resources requires high-level principle agreement.igd. and the company reported no clear visibility of improvement in on-shelf availability.

The main reasons for choosing this type of hitech solution are generally because of high land costs and/or high labour costs.2 Technology in Supply Chain Key Points to Note • Where products are fast-moving and labour costs are high. Supply Chain Optimisation 2. there are still a number of equally important obstacles to widespread implementation. This would include: • land acquisition • building construction • the commissioning and installation of the automated equipment Before embarking on an automated facilities strategy. not least the ability to create a solid business case for the largescale investment.1 Automation and Automated Distribution Centres Although automated processes have been used within logistics facilities for several decades. The process is complex. and could typically reach £30 to £50 million for a single site initiative. it is only in recent times that large-scale highly-automated distribution centres have become a reality across the industry. including sales and productivity gains.igd. • The sharing of accurate product data between trading partners could offer significant business benefits. and so businesses must ensure long-term market stability.Managing International Supply Chains 2. companies continue to investigate the productivity benefits of large-scale warehouse automation. © IGD 2006 www.2. and so there are more examples in Europe (particularly the UK. it is not unreasonable to envisage a 10 to 15 year time horizon. Germany and Belgium) than in Asia or the Americas.com/supplychain 55 . and the investment significant. • Whilst the opportunities that RFID/EPC technology offers the industry are significant. companies need to: • ensure that size and market position justify the expenditure • the solution is flexible enough to respond to changing markets demands • the market opportunities are long-term in a stable environment As such. 2. It is true to say that demand for automated facilities is particularly prevalent amongst fastmoving consumer goods (FMCG) manufacturers and retailers. The costs of any large-scale automation project are not to be under-estimated. where the costs of both land and labour have tended to be lower.

layer picking.systems must be designed to be able to manage the exceptions in a user's business model. data and order structures are • examined to ensure that the volumes can yield significant margin savings through an automated-handling solution. assumptions and projections are analysed and tested to establish an appropriate solution that matches the user's needs. the company must generate high enough order volumes for automation to really generate the labour cost savings. automated vehicle loading and off-loading systems. July 2005. The marginal cost of volume increases is much less than with manual systems. hence the prevalence in the FMCG sector.000 pallets a year for a manufacturer. Training . depending on the business complexity and the order structure. Exception Management . delivery profiles (week. 2006 Pre-Requisite • One key element of any eventual automated warehouse solution is the • Options • In terms of what can actually be automated within the facility. testing often occurs before equipment is brought to the site. and even advanced pallet movement systems (unmanned vehicles.despite automation.com/supplychain © IGD 2006 . Supply Chain Optimisation Managing International Supply Chains Benefits of Automation Lower long-term operating costs. and then finally on-site with simulated or actual volumes. and will be integrated with each specialist piece of equipment. conveyors or monorails).2. Improved accuracy in picking and loading. including: order structure.igd. Automation represents a longterm commitment. which will act as the 'nerve-centre' of every automated process within the facility. no matter how small. Source: Exel. One leading service provider has suggested 400. lead-times. In order to ensure success. Challenges of Automation High initial capital investment. contracted service levels and quality. • Through simulation modelling systems. The Process Analysis • Business information. 2006 In order to justify this level of fixed asset investment. IGD Research. there are a 56 www. well in advance of implementation. whole host of possibilities. and voice-activated picking through to case-sortation systems. people are still employed in a whole variety of roles. core warehouse management system. and ideally to have used them before the facility 'goes-live'. because any level of manual intervention or reconfiguration is likely to increase costs. off-line as a fully-integrated system. month and year). There is a requirement for longterm planning and vision. Improved productivity and speed of response.the best-designed solution will still fail to deliver the desired results if the software is poorly configured. from pallet storage and retrieval. 2005/IGD Research. Source: Exel. from which it is not easy to disengage. What to Watch Software specification and configuration . It can be difficult to adapt if significant business changes occur. It is vital that certain criteria are established before any solution is established. and these people need to understand the systems and processes in detail. and any growth assumptions. and one million cases a week for a retailer.

There is also a specific area to service the smaller convenience store outlets. which sorts cases by store. UK In 2001. generating over US$36bn in revenue. The Facilities • Real-time order status visibility • Bespoke warehouse management and information systems • Automated replenishment • Paperless 'pick to light' and radio confirmation systems. The site was purposedesigned and built by Exel. guiding personnel to the exact pick location • In-cab yard management system • A control centre The Process Inbound Goods are received.com/supplychain 57 .400 stores in 36 states and the District of Columbia. 2006 Case-Study .Automation in CVS/Pharmacy. and serves over 550 Tesco stores. and then sent via case conveyors to a sorter unit. 2005/IGD Research.Managing International Supply Chains 2. assembling orders for each store by product group e.000 pallets a year of frozen goods from suppliers and some 52 million cases and two million rollcages are dispatched every year. The warehouse receives 800. Supply Chain Optimisation Key Focus . Order instructions are given to pickers in the high-bay using a pick-to-light system. Pick Outbound Source: Exel. spread over almost 9 hectares. placed on a conveyor system.g. Tesco opened a 380.Automation in Tesco.000m3 facility. and then put away in the high-bay storage area using elevators and cranes. where cases are picked by common batch. to act as a state-of-the-art automated distribution centre for frozen goods. The goods pass via chutes to loading personnel. ice-cream. © IGD 2006 www. CVS has been focussing on re-working their supply chain to create a highly-responsive end-to-end fulfilment process for the drugs part of their business. and dispensing prescriptions in over 5.igd. who load roll-cages onto trucks for each store by merchandise group. USA The Business CVS/Pharmacy is America's number one pharmacy chain. system-scanned. weighed and profiled. Over the last few years.

and 70% of items are also dispatched as singles. a leading international solutions provider for automated material handling and logistics systems. and improved productivity.000 deliveries a year. over 45% of CVS volumes are now managed via Collaborative Planning.000m2 facility in Ennis.This included the closure of their Garland facility in Texas and the transfer of volumes to their Ennis automated warehouse. increasing land and building costs. CVS introduced a fully-automated system into their 37.igd.2.100 store deliveries per day with a 98% on-time delivery record across the 103. including two incorporated sites from acquisitions.com/supplychain © IGD 2006 . Forecasting & Replenishment (CPFR) processes. In this way. individually picked. also in Texas. 2005 With the help of Witron. who has a particularly strong focus on picking systems for the food and retail sectors. The current network in 2005 included seven full service depots.000 truck loads making 300. including an average US$34.000 inventory reduction in store. Supply Chain Re-design Against a backdrop of a shrinking labour pool. and opportunities to make productivity gains and make inventory work harder. thus helping to double inventory turns to five per year between 1996 and 2003. CVS planned to simplify the network. Supply Chain Optimisation Managing International Supply Chains The Supply Chain With a network of distribution centres across the eastern and southern states of America.5 billion items are. 2. In terms of the warehouse operations. and five satellite DC's. which is half the size of a more conventional warehouse and services stores in the south and south-west of the country. and making significant inventory gains. 'Goods to Person Automation' Source: CVS/Pharmacy. CVS has introduced an automated warehouse system that gives them competitive advantage in the sector. CVS makes over 1. 58 www. Texas. in a push to secure less foot-print. less direct labour. for the most part. CVS has implemented best-in-class computer-assisted processes.

A more cost-effective roll-out to other DC's in the network (e.igd. 2006 2.2. Each delivery is also customised to the store layout. Source: CVS/Pharmacy. 2005 Benefits These store-orientated solutions have brought significant benefits for CVS: • • • • A smaller warehouse labour force (1/3 less). Florida to be completed by late 2006). dynamic order picking with product scanning and weighing. but is moving much more towards implementation and strategic planning. and includes de-boxing stations for transferring product from outer boxes into tote boxes.com/supplychain 59 . 'Customised Deliveries' Source: CVS/Pharmacy. The elimination of store backroom sorting and segregation.g. Reduced order lead-times. as companies recognise the potential of this technology to revolutionise the FMCG sector. Core elements of the DC technology infrastructure are Witron's Dynamic Picking System for individual piece-picked items and Module Picking System for product picked in full cases. Companies who focus too strongly on the technology element are likely to lose ground to the market leaders in the longer term. and further conveyors to transfer the full tote boxes for store delivery around the facility. automated receipt conveyors. Supply Chain Optimisation The Solution The facility utilises extensive automatic storage and retrieval technology to present items to pickers as needed. Therefore. Supply chain executives want to know more about the timing for getting started and how to develop a business plan. © IGD 2006 www.2 RFID/EPC It is fair to say that the interest in Radio-Frequency Identification (RFID) technology and the Electronic Product Code (EPC) continues throughout the industry. general interest in EPC is now no longer centred solely on the technology element. 2005/IGD Research.Managing International Supply Chains 2. whilst improving basic operational processes and data accuracy will go some way in allowing companies to keep up with the early adopters. Vero Beach.

Challenges There is nevertheless general acceptance that challenges to broader-scale implementation still exist. with the most positive gains coming from case and pallet-level tagging in the medium term. Supply Chain Optimisation Managing International Supply Chains This trend has been perhaps encouraged not only by the first global standards being established in 2004 via EPCglobal. as the experience from the industry innovators helps drive broader adoption. 1. technology short-comings. lower shrinkage. Increased productivity in-store and within the warehouse may also be large-scale benefit of EPC. Benefits of EPC Shareholder value. these can be split between 'up-front' costs and 'recurring' costs: 1. Dec. and clean. Other benefits could include demand-driven inventory levels.com/supplychain © IGD 2006 . better location visibility and greater scanning efficiencies. reduced claims for shortages. In terms of cost drivers. through revenue growth. involving the costs. 2005). improved asset management. The potential for sales up-lifts from improved on-shelf availability is no doubt the primary source of benefit. Activities affected may include: • • • • • Cycle counting Data entry/reconciliation Picking Scanning of licence plates Replenishment from store back-room 3.2. standardisation. sensors) Software (customised development. due to improved stock files. could all be affected by the potential of EPC. but also growth its commercial use. accurate data. and greater transport efficiencies. Gartner equally forecasts worldwide RFID spending to top US$3 billion by 2010. which is a world-wide user-driven standards organisation for EPC. obsolescence and product diversion figures. Up-front Costs • • • • 60 Reader systems (antennas. and the Gartner Group has forecasted that worldwide RFID spending is expected to total US$504 million. and companies will need to consider a number of factors when quantifying this improvement: • • • • Typical category out-of-stock (OOS) rates Percentage lost sales Percentage OOS situations that EPC could address Speed of tag implementation 2. profit improvement and higher capital efficiency. data management) Data integration and alignment services (process or system changes) Infrastructure (label printer servers or EPC data storage) www.igd. an increase of 39% from 2004. It has been reported that just over 600 million tags were delivered in 2005 (IDTechEx.

and is due to go-live with a further 200 suppliers. Wal*Mart is driving RFID rollout at a case and pallet level. seeing their RFID business objective as effective product tracking to reduce inventory and waste. in order to be more responsive and manage supply chain complexity. Wal-Mart has now set-out plans to double the number of RFID-enabled stores to 1. Key Focus . Recurring Costs • Tags • Maintenance and support • Incremental DC/manufacturing labour (until automatically tagging for an entire product line) • Incremental inventory costs (holding tagged and non-tagged products) • Corporate overheads (manage EPC infrastructure and support) Many of the problems associated with the adoption of RFID/EPC can be solved through effective business planning. and then aim to map the technology to these objectives: • For example. In particular. Source: IGD Research. P&G want point-of-sale (POS) information in real-time to help drive manufacturing. 2006 • © IGD 2006 www.Managing International Supply Chains 2. any organisation must be clear on the business objectives.000 by the end of 2006. Companies like Dell Inc are implementing new systems to supervise their manufacturing system better. and the introduction of the Gen2 standard for tags will help with wider adoption. RFID Roll-Out Following the retailer's trial a year ago with 100 preferred suppliers.com/supplychain 61 .igd.Wal-Mart US. and are implementing an end-to-end information system linked to its own supplier base. Supply Chain Optimisation 2.

read rates improved dramatically. When in close proximity to the shampoo. Accurate product data is viewed as the base building blocks for other supply chain integration initiatives. Supply Chain Optimisation Managing International Supply Chains Key Focus . SATO installed an automatic pallet labelling system in Nestlé's warehouse in Rangdorf. June 2005/IGD Research. 2006 Global Commerce Initiative (GCI) & IBM Business Consulting Services. Sources: C.a barcode labelling.igd.placed an air gap between the chip and the bottle.2. Nestlé participated in the Metro's RFID roll-out. How? • Product information is communicated between trading partners in an automated. Good data is the key to best-in-class international supply chains.Metro/Nestlé & SATO Germany. In trials. A standard adhesive label is folded to produce a flap at right angles to the product. SATO . 2006 2. leading to the creation of the 'Flag Tag'. Heinrich (SAP AG). which went live in early 2005. and the chip is embedded into one side of the flap.2. making it easier to do business. and is now automatically labelling pallets of goods with tags embedded in Flag Tags. tagged bottled shampoo was discovered as having low read rates. there was degradation in the electromagnetic field of the RFID dock-door reader. RFID During Metro's leading-edge work with RFID. quick and faultless way.3 Global Data Synchronisation (GDS) Simply. including EPC roll-out. 2006 Logistics & Transport Focus. In response. Summer 2005/IGD Research. 62 www. printing and RFID solutions provider .com/supplychain © IGD 2006 . 2005/IGD Research. • Changes to the product data are known instantaneously to all partners. the GDS network aims to include the uninterrupted flow of standard. Germany. compliant product information between manufacturers and retailers. in 'Logistics & Transport Focus'. and there was no reduction in performance even when the tag was folded flush with the label.

4. 2006 © IGD 2006 www. The data pool sends basic item data to the registry. 2006 The Building Blocks of the GDS network • • • • EAN-UCC standards Certified data pools Interoperability between the various data pools The registry to act as "global yellow pages" of manufacturers and the products they sell Benefits of GDS Increased sales • Improved speed-to-market • Improved on-shelf availability for promotions and new product introductions.Managing International Supply Chains 2. A retailer requests a subscription at their home data. 3. 2.com/supplychain 63 . 5. A manufacturer sends item data to its home data pool. The retailer’s home data pool will forward the request through the registry to the information provider. Reduce costs Increased productivity • Fewer deductions and lower returns • Reducing the time spent by sales and buying teams handling new line data • By customer service on purchase order corrections • By the finance teams on invoice reconciliation. 2005/IGD Research. Source: IGD Research. Supply Chain Optimisation Global Data Synchornisation Vision 1. The registry holds basic item data off all items including its home data pool. Trading partners synchronise item information between their data pools. Source: Sara Lee.igd.

thus helping provide clear direction to local management.com/supplychain © IGD 2006 . Source: Sara Lee.igd. "We have a top line issue and need to focus on other priorities" . "We don't have resources" .2. "We don't want to synchronise price data" .This is currently acceptable. Supply Chain Optimisation Managing International Supply Chains Frequently-Made Remarks about GDS • "Retailers are not ready" . but standards including security are under development. and so suppliers should be ready to talk to them about GDS. • "Standards are not ready / complete" . and again enforces a priority decision for local management teams. 2006 64 www.You can always start with what's available. 2005/IGD Research.Many are preparing themselves.The available set is considered to be • • • • workable.GDS needs to be a business priority mandated by Senior Executive Management teams.This might increase if suppliers are not able to comply with retailer requests. "Not all local attributes are in GDS" .

cross-docking. Supply Chain Optimisation 2. such as Carrefour. Retailers are no longer only interested in the product and the pricing strategy. but the whole supply network. the phenomenon of Factory Gate Pricing (FGP) has over the last few years become widespread practice in the food & grocery sector.igd. there are still many opportunities for transport users to reduce the number of trucks delivering half-empty outbound loads and empty return legs. is just one of the many total supply chain solutions that a growing number of logistics service providers have to offer the industry.com/supplychain 65 . 2. In terms of efficiency gains. as international retailers aim for improved supply chain visibility and control. and certain factors are playing a key role in challenging transport users: • • • • • fuel costs legislation road tolls congestion charging lack of investment in major road. © IGD 2006 www.3. from global sourcing through to store delivery. and how improvements and efficiencies can be made upstream to improve performance downstream.Managing International Supply Chains 2. There are various initiatives that both retailers and leading manufacturers are now employing to optimise transport resource and increase efficiencies. But there are still many challenges to overcome.1 Factory Gate Pricing As the leading supermarket groups. Tesco and Metro strive to gain further visibility of their end-to-end supply chains. In terms of costs. whilst helping reduce environmental pressures. • End-to-end transport management.3 Optimisation Through Transport Key Points to Note • Factory-gate collections and cross-docking practices are becoming more widespread in the food & grocery sector. including factorygate pricing. inter-modal activities. rail and port networks. transport accounts for a significant proportion of total supply chain costs (37%+ according to IGD's UK Retail Logistics 2006 report). • Inter-modal distribution offers the logistics sector a means of driving supply chain efficiencies. Transport inefficiencies and rising costs are the two key challenges facing the road transport sector in Europe in particular. and fourth-party logistics transport management.

2 Cross-Docking Cross-docking.3.Lost sales . Supply Chain Optimisation Managing International Supply Chains What Makes up the Total Product Cost? Retailer Secondary Logistics Network .igd.com/supplychain © IGD 2006 .where the end-customer is assigned prior to receipt by the retailer .Transport In-store Logistics ‘Back Door to Shelf’ Availability Costs . involves the reduction in handling by sending warehouse received goods directly out to stores or another transit point. so that any scale efficiency opportunities can be identified from potentially integrating retailers' primary networks with their secondary fleet movements into stores. could potentially include lower overall costs.Customer dissatisfaction Goods/Material Flow Information and Cash Flow Source: Tesco The focus for the retailer is to have visibility of inbound supplier transport costs.Markdown .Waste . Order quantities can be allocated 'pre-distribution' . like cages Increased supplier costs. which presents both opportunities and challenges for the manufacturing supplier base. Subsequently.2.or 'post-distribution' . by-passing warehouse storage and traditional picking.where the end-customer is assigned by the retailer warehouse.Primary . especially for the smaller manufacturer. on the other hand.DCs & Secondary Transport Raw material and supplier inbound Supplier Transformation Retailer Inbound Logistics . Some of the challenges for suppliers involved in factory-fate collections may include: • • • • • The collecting vehicle arrives without a booking The collecting vehicle does not arrive at all Cleanliness of the vehicle can sometimes be compromised Vehicle can contain returnable transit units. 66 www. and a focus on core competencies through: • Lower capital expenditure on vehicles and systems • Reduced head-count (drivers. the factory-gate initiative is also about supply chain control. yard management) • Smaller administrative burden 2. administration staff. lower risk. due to loss of scale efficiencies for other customers In contrast. some of the benefits of factory-gate collections.

Premise: • • • • • • Enough volume to warrant a dedicated process Effective information and visibility Cross-functional communication and co-ordination Real-demand reactivity IT system that supports the new process Constant product flow in correct quantities and quality Case-Study . consolidation and stockless inventory processes. 2006 © IGD 2006 www. Metro Group has 2.5million customers a day. a typical Cash & Carry store could receive over 150 vehicle deliveries a day. Doublehandling and inventory are accepted supply chain costs. Metro manages one million SKU's from 8. To support the development of the Metro Group across Europe. and has seen rapid expansion over recent years: 1996 Germany 1999 Turkey 2000 Poland 2001 Austria 2003 Bulgaria 2004 Russia. or on average 3. In terms of logistics. as well as the department stores Kaufhof. FGP and Cross-Docking The Business The Metro Group trades across various formats from the Cash & Carry business (Metro/Makro) through to Food retailing (Real/Extra) and Non-Food retailing (Planet Saturn.000 suppliers. servicing 2. where over 80% could only be one pallet of stock.Metro Group Logistics Germany. Supply Chain Optimisation In either process. Belgium Netherlands UK Greece 2005 Slovakia Hungary Ukraine Czech Rep 2006 Italy Spain Serbia Croatia Bosnia Romania Source: Metro Group. 2005/IGD Research.300 stores in 30 countries. in the past.1 pallets of stock per vehicle. generating over €50billion turnover. and cross-docking works to reduce. Media Markt). supplemented by factory-gate collections.com/supplychain 67 . MGL aims to connect networks across borders. The Initiative In order to reduce this complexity within the supply chain. these by improving productivity and speed of transit. Metro Group Logistics (MGL) focuses on cross-docking. if not eliminate.Managing International Supply Chains 2. the aim is to move stock straight out onto waiting vehicles.igd. Within Germany.

Chilled products (23). • 4. it enabled greater flexibility in the process. 98% on-time delivery.com/supplychain © IGD 2006 . with fixed collection times Well-built pallets with clear labelling All claims are centralised. Parcels (65).3 million shipments per year worth €10bn • Some suppliers with agreed procedures can receive replenishment orders directly from stores • Pre-allocated orders are prepared and picked by suppliers and then cross-docked through the network Results • The average truck fill to Cash & Carry outlets has increased to 30 pallets . This has generated less traffic. 68 www. Supply Chain Optimisation Managing International Supply Chains Factory Gate Collections Process 1. of which €70m savings from transport consolidation and €80m savings from reduced waiting times for vehicles. Metro carried out the initiative in partnership with their third party logistics providers (3PL) with no long term contracts or fixed costs. Metro Group has identified the following benefits from taking control of the transport element of their inbound supplier deliveries: • Macro-economic effects worth €150m. which has allowed for synchronised replenishment A reduction in damages of 20% Improved availability of +7% Reduced total inventory • • • • Cross-Docking Process • Combining transitional groupage. Palletised non-food (35). Alignment of the rules: • • • • • • Standardisation of transport documentation Priority lanes for MGL/3PL for loading.full truck loads. and cross-docking via other centres.2. 2. so MGL manage all the financial transactions MGL will bear the cost of small damages Multi-drop store formats are consolidated into one shipment Results Through having visibility of fuel costs and logistics costs separately from the cost of goods. Hanging garments (17).igd. Metro has a series of cross-dock facilities around Germany: Palletised ambient food (16).400 suppliers are involved • 8. and so less pressure on infrastructure and less of an environmental burden. direct to store deliveries.

subsidies. particularly for ordering and goods receiving 3. it has been reported that four different train engines are required to take goods from Austria to Sweden.These aim to combine volumes to increase freight buying power and critical mass. general environmental concerns.com/supplychain 69 . there are equally many challenges facing further growth in this logistics sector. In response to these complexities. Buying and Supply Chain 2. Supply Chain Optimisation Metro Group's Key Learnings 1. encouraged by government policy. with a knock-on effect on quality of service provision. and drive better margins and competitive pricing through greater consolidation. Strong commitment from the internal teams .3.air. It can be a challenge to get suppliers to calculate the transport costs. and it took Metro three years to transfer the model outside the German territory 5. some in the logistics sector have been calling for a level of harmonisation at European level for tax systems. rail. Logistics providers are also launching 'gateway' strategies. one per country crossed.Managing International Supply Chains 2. It is argued that centralising document management and financial control for pan-regional movements will also help reduce hidden costs. Nevertheless. there is the problem of the inter-operability of the modes. sea and road freight capabilities . Define the principles for dealing with the logistics service providers 4. as these are still often considered to be an integral part of their operations Source: Metro Group Logistics.A European Perspective There is increasing demand for inter-modal services from commercial organisations. This can take time. It is important to define the rules and accountabilities. that is to say. and congestion on road networks. In addition.3 Intermodality .aiming to make the total supply chain more responsive.Sales. working regulations and weight limits in this area of operation. High visibility of goods movements can be gained from combining different modes of transport . For example. and so improve decisionmaking © IGD 2006 www. 2005/ IGD Research. Capacity and infrastructure issues combine to increase costs and congestion on rail links and waterways.igd. Separate logistics-related negotiations from merchandising negotiations by the commercial team. 2006 2.

The water level of the Danube has been stabilised by dambuilding further upstream. with one quarter being sheltered warehousing. Further traffic growth appears to be secure due to the following factors: • The Rhine-Main-Danube waterways between the North Sea and the Black Sea is • • one of ten trans-European transport corridors having priority bidding for EU funding Romania and Bulgaria are also due to join the European Union in the near-future The range of goods that can be handled at the port Source: Pierre Topolski. 'Supply Network'. Inter-modal Hub Management In order to exploit the economic growth in Eastern Europe and entry into the European Union.SPaP Bratislava.000m2 of storage.com/supplychain © IGD 2006 . particularly over-sized or over-weight cargoes via a special crane • 100. is developing its potential as an inter-modal hub for road. a Slovak company . allowing improved effectiveness in carrying higher volumes of goods.based at the Port of Bratislava on the Danube. Supply Chain Optimisation Managing International Supply Chains Key Focus . pumping fuel direct to ships or from ships to rail tank wagons SPaP expects to handle approximately 25.000 containers at the Port of Bratislava in 2005. June 2005/IGD Research. With close proximity to both Vienna (Austria) and Budapest (Hungary). but the port is capable of meeting much higher demand for both transhipment and container warehousing.000m2 of customs warehousing • A direct connection to a local oil refinery.2. as well as almost 5. the port boasts: • Connections to motorway networks and the Bratislava-Rotterdam shuttle train service • Capability of transferring containers between all three modes of transport.igd. rail and watertransport.SPaP . 2006 70 www.

400 of those were transported from the sea-port to the NDC via a river-port by barge. and believes there are three basic pre-requisites before venturing into river transport: 1.800 went into France. © IGD 2006 www. and views this mode of transport as a key alternative to using the congested road network. hi-tech and household equipment). and 6. Auchan has re-organised its storage and distribution network for non-food lines (such as textiles. There will equally be some warehouses that are not close to inland waterways. Since purchasing Docks de France in 1996.Linking Global with Local Case-Study . Although the costs and performance can be on-par with road transport. Meyzieu (Lyon) and Villabé (South of Paris). that multi-modal transportation can present challenges. A distance greater than 150kms of continuous maritime transport Containers can be blocked at sea-port due to industrial action. from where the final journey will be carried out via road haulage. Logistics facilities close to the river network. and so cannot be serviced by river. The Process With 95% of imports coming from Asia and arriving by container directly into French sea-ports (Marseilles-Fos.Managing International Supply Chains 2. Consolidation of volumes towards fast-moving warehouse facilities 2. around three national distribution centres in Lesquin (Lille). the warehouse at Villabé will receive approximately 20-25 containers from the Port de Gennevilliers every day. Over the last ten years. In 2004.000 20ft equivalent containers into Europe (representing 6-7% of non-food turnover). Challenges Auchan equally admits. For example. DIY. for example Auchan's Atac supermarket non-food warehouse in Amiens. however. Auchan has grown river modal participation from just 5% of imported goods in 1995. and Auchan admits that river transport can be less flexible in terms of time (30 hours for Le Havre-Paris). Delays at sea-port may require traffic to be moved onto the road network. Dunkerque or Anvers).com/supplychain 71 . bric-a-brac. is not viable when travelling less than 150kms. the use of inland waterways (as with rail). thus requiring leadtimes to be extended to cover all eventualities.Auchan (France) Using the Canal Network The Business One of the leading users of containerised river transport in France. Auchan moves 60% of its imported non-food products by barge to its warehouses. and the need for organisation by shuttle between locations. Auchan imported 25. Supply Chain Optimisation Inland Waterways . each warehouse facility is situated reasonably close to a river port.igd. 3. Le Havre. of which 11.

Source: 'L'Usine Nouvelle'. Supply Chain Optimisation Managing International Supply Chains Advantages But when companies have a choice. In addition to the road transport gains. Auchan's lead-logistics providers co-ordinate with all other links in the supply chain. storage and cranes. Whilst other major retailers. sea freight has been attracting more attention in recent times. both directions). 2006 Long-Distance Sea-Freight Once a commoditised service. There have also been surges in sea activity between the major manufacturing locations in Asia. and two service providers who manage the container flow between Paris and Le Havre and Marseilles-Fos and Lyon. The Asia-Europe and trans-Atlantic sea routes represent 15% and 11% of total sea movements respectively. and a service provider can also carry out the customs procedures.4 million in 2004.2 million TEU's (twenty-foot equivalent container units) to 114. who works directly with three main partners .the Port of Lille. To ensure that the lead-times are viable and secured.000 TEU's). and the trans-Pacific sea routes dominate global movements (52% of sea freight. representing a 68% increase. June 2005/IGD Research. and port facilities are extending in terms of size. the process works relatively seamlessly for Auchan. In this way. containerised river transport in France grew by over 6% in 2004. Although seeming complicated by the number of interventions.The sector is working together to increase capacity through larger vessels (8. Auchan has reduced its inbound transport kilometres by 12%. Modern ships are now faster .com/supplychain © IGD 2006 .igd. Monoprix and Toys R Us are moving in the same direction. including Carrefour. Such additional capacity is expected to come on line throughout 2006 and 2007.thus reducing the time on the water. particularly in response to increasing world trade since 2000. Accompanying these trends. the main advantage of the river port over the sea-port is that the containers can be stored there for up to 45 days. there have also been improvements in both dependability and predictability of sea freight operations.average speed has increased from 21 knots to 25 knots .2. thus smoothing deliveries into the NDC. in India and Central and Eastern Europe.000 TEU's instead of 5. Source: Exel. and is expected to do the same in 2005. It is of no surprise to learn that China dominates the world market. Auchan believes it is better to favour a more environmentally-friendly and sustainable alternative to road transport. 2006 72 www. at a lower cost than sea-port demurrage. 2005/IGD Research. The market has increased from 68.

6m trailer. Use of Ports ASDA has recently signed a deal to develop a new £20m import centre at Teesport. The goods are then moved to the export port. which overcomes problems of different unit sizes. © IGD 2006 www. opening and repacking at each transit point. 2006 Short-Sea Shipping . In the UK. pallet-wide. The deep-sea container facility will not only help ease congestion at more southern UK ports. such as Gdansk or Riga. The Process The process usually involves the movement of 45ft. Source: IGD Research. but increasingly short-sea solutions are becoming a more considered option. the benefit of a northern and southern entry point is the subsequent reduction in over-land driver time. high-cube containers of finished goods from factories in Eastern Europe through to Benelux and the UK.com/supplychain 73 . such as Poland. There appears to be a trend towards this type of transit unit. The advantage of the short-ship movement is that sailing and arrival times can be predicted more accurately and the smaller size of vessel reduces loading and discharging delays. management of vessel berth. due to their acceptance for lower traffic volumes. or Rotterdam in the Netherlands and Zeebrugge in Belgium. both of which present the warehouse with productivity issues. providing ASDA with an international logistics operation in the north east of England for direct international imports of non-food lines. the Baltic States and even Russia. and labour availability. These containers have the same capacity as a 13. Companies purchasing transport in these regions have a variety of options. but will also save two million road miles a year through shipping 70% of its non-food distribution direct to Teesport. The short-sea shipping company may be given 10 to 14 days' notice of a defined delivery window into the receiving warehouse.igd. but have the additional benefit of improved security. like Felixstowe and Southampton. Slovenia. and the service provider will then contact either road hauliers or rail-providers to collect the box from the factory.ASDA UK.Managing International Supply Chains 2. Smaller ports are seen to play a key role in short-sea shipping. and will ensure the smooth inter-modal transportation of goods across Europe without the need for disruption.Supply Chains from Eastern Europe Whilst many companies in their search for a cheaper manufacturing base are sourcing products from Asia. some are also turning to their Eastern European neighbours. and so the reduced risks of early and late deliveries. including the more traditional all-truck overland system. Supply Chain Optimisation Key Focus . and shipped on a regular service into Western European ports such as Ipswich and Tees port in the UK.

as goods are shipped in a • • • • • sealed container. despite environmental concerns. Ironically. Some in the industry believe that containers will be tagged or bar-coded. on time. and poor service levels.overcoming delivery window issues . Larger sea-ports can be unwilling to handle lower-volume carriers. Overcoming the prevalence of price as the main purchasing objective. and ensure those tight delivery windows are met.shortening the time spent on the road . • • Source: Kuisiu Linija. Local hauliers are used at each end of the short-sea trip: . Integrating hauliers and shippers through a web-based system will allow operators to log-on and track goods movements in real-time. the key to a successful flow of goods from one region to the next is often based on the people carrying out the work. trust-worthy business relationship will help overcome the most challenging of supply chain issues.com/supplychain © IGD 2006 . 74 www. Technology improvements will also play a leading role in ensuring traceability of the containers. Wide political support. especially from the European Commission. Having a combination of the right people and an open. Improved quality and service compared to low-cost international truck hauliers. will reduce the pool of low-cost drivers left for operators in Eastern Europe. • More secure. as is the case in many parts of the supply chain.igd. Customs inconsistencies between member states.reducing language barrier concerns • Ability to convince sourcing companies of • • the viability of short-sea shipping for timepressured supply chains. thus pushing up costs and reducing service quality. More environmentally-friendly. quality issues. 2006 Future Developments More traffic will be pushed towards short-sea shipping as the driver shortages and road congestion become more acute. Supply Chain Optimisation Managing International Supply Chains Short-Sea Shipping . Englishspeaking Eastern European drivers into the UK market. Finally. every time. so they can be entered into an IT system and tracked as a unit.Opportunities and Challenges Opportunities Challenges • Cheaper than over-land movement.2. despite already working within a harmonised framework. Less congestion and traffic bottlenecks. it is likely that the pull of well-skilled. Competition from rock-bottom pricing of Eastern European haulage companies. 2005/IGD Research. where the shortage of skilled drivers is considered to be a significant challenge.

Kursiu Linija services a number of ports. whilst ensuring service levels are met.Kursiu Linija Kursiu Linija was created in 1995 to provide logistics services from Russia and the Baltic States through to Western Europe. thus driving further efficiency gains but still having one point-of-contact for issue resolution and reporting.com/supplychain 75 . The Benefits • Lowering overall transport costs • Increasing service proficiency. through constant monitoring of carrier performance • Reductions in breakages. including Kaliningrad. including status tracking. loads. high-cube boxes . trip scheduling. Klaipeda. secure and has the ability to execute orders in the most cost-efficient manner. Ostend. owns its own fleet of pallet-wide.including refrigerated containers. Marks & Spencer and IKEA. 2006 2.Managing International Supply Chains 2.4 4th Party Logistics Transport Management Using a major third party logistics provider to manage transport orders and outsource the movement of goods to a series of other haulage providers can be viewed as an opportunity to take a more holistic approach to transport management.3. planning and optimisation.over 3. Source: IGD Research. Supply Chain Optimisation Key Focus .000 units in total . The company employs seven fully cellular vessels. and is now moving over 125. such as Masterfoods. Through examining all potential movements across a particular region. The ability to share vehicles and/or combine outward and return trips can considerably reduce the number of partloads and empty trips. key performance indicators and trip payments. which is robust. The Process Improved network design and execution from greater visibility of the end-to-end supply chain can cut transport costs quite considerably. drivers and vehicles can be optimised across multiple customers.000 TEU’s annually for major clients. At the heart of such a process is the need for an integrated information system.igd. losses and missed deliveries • Greater speed and flexibility • Creating a genuine pan-regional platform for transport management © IGD 2006 www. and Ipswich and has even opened new offices in Felixstowe as part of their growth plans.

com/supplychain © IGD 2006 . Supply Chain Optimisation Managing International Supply Chains Case-Study . For example. and the service is used by more than 20 Exel customers. seven days-a-week. warehousing and managed transport. The Benefits • Better fulfilment at retailer distribution centres • Transport cost savings through reductions in mileage and route and load optimisation • Environmental gains in terms of truck movements and emissions • Overall simplification of the transport management processes. and interacts with more than 200 transport carriers. Lux soap bars will be exported from Brazil to a platform in Europe. In 2001. Service Growth In 2005. and now Exel controls all international primary transport for the Unilever UK Foods. Unilever was Exel's first customer to pilot the solution. route optimisation and European carrier management across 18 different European countries. which can sometimes conflict with optimisation techniques. Foods Freight Management The Process Exel manages a pan-European solution for managed transport from three multi-user control centres in Mechelen (Belgium). Unilever in Brazil has contracted Exel to provide an integrated supply chain solution to include in-plant logistics.Exel and Unilever UK. more frequent deliveries and shorter lead-times. Source: Exel. Exel aims to work to meet the challenges presented by demand for smaller. The operations run 24-hours-a-day. plus some dedicated sites.igd. July 2005/IGD Research.2. The solution will provide Unilever with complete visibility and tracking. Nieuwegein (Netherlands) and Hams Hall (UK). within Brazil and towards Europe for home and personal care products. 2006 76 www.This solution manages all scheduling. where the European managed transport team will then arrange distribution out towards 18 other European countries. and deals with almost 40.000 orders a year.

9% retail growth in 2005 alone. and large populations with high. • With 12. are able to reach the most remote areas of the country and increase their brand awareness. With widespread investment from the leading international food & grocery players. and the use of field sales forces. and legislative differences. • India currently restricts foreign direct investment from multi-brand retailers. © IGD 2006 www. infrastructural & operational. as the major international retailers move into these markets. • Leading manufacturers. India and Central & Eastern Europe offer a plethora of opportunities for the food and grocery industry. combining the size of these countries and the remoteness of some of their populations. further supply chain investment will certainly encourage this trend. and strong logistics and financial management. but relatively untapped consumer demand. there are significant challenges for the speed of supply chain transformation. are present in the Indian market. and via the distributor route to market. companies need to focus on inventory management. Retailers are transferring best practice into these markets bringing their supply chains up to speed and in line with their domestic markets. cheaper production costs.Managing International Supply Chains 3. • Central & Eastern European countries have increased their profile on the international retail stage.com/supplychain 77 .igd. in terms of global sourcing. IGD predicts that China will soon become the second largest food retail market in the world by 2020. International Differences and Emerging Markets 3. • Nevertheless. • The emerging markets of China. These differences can be grouped under cultural. quality and customs control. and so it is fair to say that there has not been the same level of investment in developing modern retailing practices and new transport links as has been the case in China. effective cross-functional communication. with India moving into a top five position. internal & external business management issues. • In terms of global sourcing. with a number of legislative restrictions and infrastructural limitations. International Differences and Emerging Markets Summary • IGD’s international survey confirmed that companies encountered different supply chain challenges depending on the market in which they operate. however.

In response. IGD asked companies to identify differences in the supply chain challenges faced by different country markets. leading to service level issues When exporting. which highlights the real diversity in this area of operation for many companies.1 Managing International Differences Within the IGD international survey.3. 72% of companies cited different supply chain challenges depending on the market. compared to 'home territory' orders which can be very volatile Availability issues in some developing markets can be solved through using extra lower-cost labour..igd./ • 78 www. IGD has grouped them into distinct themes: • • • • Cultural differences Infrastructural or operational differences Internal and External business management issues Legislative differences International Differences in Supply Chain Challenges Theme Cultural Challenge Examples • Different shopper preferences. in order to understand the similarities and differences between geographic areas and whether there were any truly ‘international’ supply chain issues.com/supplychain © IGD 2006 . International Differences and Emerging Markets Managing International Supply Chains 3. rather than modern supermarkets Infrastructure & Operational • Lack of cold chains in some developing • • • markets Bottlenecks at ports Export and goods movement permit controls A lack of truly international logistics companies means that different contractual agreements have to be made for different countries • No public cold chain logistics supply in China • South American ports • Permit issues in Russia and former Soviet Union states. the required quantities are often fixed well in advance. international franchise operations are generally managed differently from wholly-owned stores Critical mass can be an issue in developing markets.. particularly • with regards fresh produce Different language variants/customisation • Germany prefers lean meat • Japan prefers meat with more fat • Indians prefer to shop in wet markets for fresh produce. whereas in more developed markets alternative solutions are required contd. India and China Internal • Demand volatility depending on brands life• • • cycle For retailers. In order to help differentiate these issues.

require different outbound logistics solutions and demand planning Different performance management • In the UK and northern Europe there tends to be more centralised distribution and delivery into distribution centres.Managing International Supply Chains 3. However. and will be the focus for the remainder of this chapter.com/supplychain 79 . and pallet requirements Different trade structures. India and Central & Eastern Europe are experiencing growing international stature and phenomenal economic growth. due to short lead-times and demand fluctuations • • • Legislation • Different legislative requirements for • • permissible ingredients in food products Different requirements for ingredient declarations and labelling Different legislation for driver hours • Switzerland . with different levels of market concentration. or simply the market structure.vis-à-vis the adoption of the European Working Time Directive . infrastructural inadequacies. International Differences and Emerging Markets International Differences in Supply Chain Challenges (continued) Theme External Challenge Examples • Different approaches to bar-coding. there is a tendency for more direct-to-store deliveries The UK focuses heavily on delivery within a fixed hour delivery slot. these countries have become priority markets for international retailers and manufacturers alike. 2006 Undeniably. © IGD 2006 www. Spain and southern Europe. shelf-ready packaging.Transport Source: IGD Research. whereas in Italy. but with heavy penalties if this is missed The UK is viewed as one of the most difficult markets to satisfy. As a result. whether through legislative restrictions. case-sizes. whereas in France it could be delivery on the day. the emerging markets of China. • packaging. all present the international supply chain with a sometimes distinct set of challenges and opportunities.igd.

2006 Wal-Mart Canada • Heritage in non-food • Acquired Woolco in 1994 • Single format operation • 262 stores.Taking two highly developed retail models – UK and Canada. Assimilating International Operations Market Dynamics Wal-Mart is held up as a world class supply chain operation with highly sophisticated global processes to help its people manage a multitude of products and systems. deliver in bulk Within its Canadian operation there is a high level of consistency between processes to ensure product is delivered in an efficient manner. Wal-Mart No of DCs Average distance to store Inventory Management Distribution Function Clothing Distribution Technology Employed Core Focus of Distribution Source: IGD Research. But the starting points for both businesses has been very different – the UK with a focus of food and Canada with a focus on non-food (alternatively known as general merchandise). In this respect Wal-Mart Canada possess very strong implementers within its business. ft. 40. Wal-Mart has entered both markets through acquisition and demonstrated strong growth through store openings and increased sales.000 sq. Supply Chain Infrastructure The differences between the two businesses are reflected in the supply chain infrastructure needed to support them. But for any business of this scale to be successful there is a balance between being global and being local.3. extensive use of cages Canada 6 500km 90% stockless Outsourced Integrated Fully automated Simple efficient distribution e. Source: IGD Research.g.com/supplychain © IGD 2006 . there are clear distinctions between the Wal-Mart businesses.igd. Wal-Mart UK • Heritage in food • Acquired Asda in 1999 • Multiformat operation • 282 stores.000 employees • Average store 120. ft. The warehouse is a highly automated environment akin to a production environment. With the average distance to store over ten times compared to the UK – transport efficiency is a determining factor. 70.000 employees • Average store 43. International Differences and Emerging Markets Managing International Supply Chains Case Study Wal-Mart.g. 2005 UK 21 48km 5% stockless In-house Separate site Manual (with some automation) Store friendly deliveries e. 80 www.000 sq.

Managing International Supply Chains 3. COO. For Wal-Mart simplicity and accountability enables execution and that’s what helps to deliver results. with limited amount space the supply chain needs to ensure fast and frequent replenishment in a store friendly manner (enabling the product to be put onto shelf in the quickest way). Sharing global processes is an important aspect of any modern international business but they need to assimilate the differences between the different countries of operations. Asda/Wal-Mart UK Source: ASDA. 2006 © IGD 2006 www. International Differences and Emerging Markets In the UK the supply chain strengths are more technical. Centralised orders are also commonplace.com/supplychain 81 . Conclusions “Change is a compelling argument in the UK but consistency delivers better results in Canada” David Cheesewright. 2005/IGD Research. This will undoubtedly change how best practice is implemented but ensure it is sustainable for businesses in the future.igd.

flexible workforce.3. and the global expansion of the consumer goods market will go some way in helping these countries support the growing needs of their own populations. production and quality issues can all affect inventory management. with leading retailers and suppliers alike . 82 www. are numerous. In contrast. the USA and Japan now need these emerging markets to maintain their own growth agendas. many companies are now seeing developing markets as key growth markets in terms of retail sales.igd. Combined with India.2 China – Retailing and Global Sourcing Key Points to Note • The Chinese economy is booming. Mexico. China and India together account for 40% of the world's population. Brazil and Turkey. although household consumption is said to remain a relatively low share of overall growth.1 Key Developments China's production capacity for clothing alone is reported to have grown from +8% per year between 1995 and 2002 to a staggering +26% in 2003. A combination of organic growth and supply chain development will help retailers consolidate their market positions. Metro. Carrefour. and with further emerging economies such as Russia and Vietnam also likely to join the World Trade Organisation in the near future.5% annually. • Opportunities in global sourcing include high local growth rates. communication channels and the financial and administration burden. The Chinese Commerce Ministry has recently reported that it estimates Chinese retail sales to have risen 12. 3.This has lead some companies to cut back the quantity of product sourced from China. especially as international retailers hold only a 3-4% share of the total grocery market. IGD predicts that China will become the world's second largest food retail market by 2020 behind the USA. and retailers are not only sourcing large quantities of product from the country. International Differences and Emerging Markets Managing International Supply Chains 3. driving further investment and stability. China is one of the most diverse and vibrant grocery markets in the world.all driving significant growth agendas. the growth of international trade will continue to accelerate. however. limiting import growth of ten types of textiles to between 8% and 12.9% in 2005.2.including Wal-Mart. Infrastructure. and a cheaper. • The challenges of the global sourcing. as the Chinese government continues to reduce restrictions on foreign direct investment. The traditional markets of Western Europe. the EU re-instated quotas on products from China. competition is on the increase. which can help improve margins. Tesco and Procter & Gamble . boosted by rising incomes and tax breaks. when quotas were lifted on imports into the European Union (EU). but are also opening increasing numbers of stores.com/supplychain © IGD 2006 . and competition is now on the increase. In response to such high import growth rates. and to ensure that risks to supply were managed through a more varied sourcing programme.

putting more investment into middle and western China. who will receive their deliveries through China's significant wholesale-distributor network. Larger suppliers are also investing in centralised distribution which will allow them to deliver to the leading retail customers within 24-hours. Large international retailers who have developed sophisticated global sourcing centres in China are also able to use the same facilities for distribution to their Chinese stores. Wal-Mart's global procurement centre is also based in Shenzen. International Differences and Emerging Markets • Carrefour acquired a 100% stake in its joint-venture in October 2005 and during the year had launched 14 new stores. Another 20 new store openings are planned for 2006. For example.Wal-Mart. Predominantly based in Shanghai. and hoped to increase its portfolio to 55 stores across over 23 cities by the end of 2005. Tesco's Chief Executive Officer (Sir Terry Leahy). IGD research has shown that Wal-Mart is one of the most developed retailers in the country. having regional distribution centres in the coastal cities of Tianjin in the North and Shenzen in the South. creating greater supply chain efficiencies. • Metro was the first foreign retailer to take advantage of the liberalisation of Chinese investment rules. has already announced that he believes the company to be only 20% into its international expansion plans. China In contrast to sourcing products from China. • Tesco already has over 30 hypermarkets in China through its 50% stake in the Hymall chain. They operate 29 stores on the mainland and have announced plans for a further 40 stores over the next 3-5 years. One aim of the centralised strategy will be to gain control over the supply chain network to ensure: • Improved service levels • Reduced lead-times • Better availability © IGD 2006 www. In addition. Case Study . Wal-Mart opened its 50th store in China in November 2005.igd. Centralised distribution through regional distribution centres is at a relatively low level of development in China. because food deliveries are made direct to WalMart stores by suppliers. there are plans to extend into the South and into Beijing.Managing International Supply Chains 3. particularly in second and third-tier cities. Wal-Mart is also a large international retailer trading within China. Wal-Mart has recently announced plans to expand its presence in China further. bringing the total to 65 stores. There are over 300 wholesalers in China.com/supplychain 83 . where the economy is less welldeveloped. In terms of supply chain and warehousing. and was responsible for sourcing US$18 billion worth of goods from China in 2004 alone.These warehouses solely manage non-food products. servicing mainly on a regional basis. mainly because many retailers only have a small store portfolio and so it is not necessarily economically viable to invest in such expensive fixed assets. This contrasts with the majority of smaller retailers.

com/supplychain © IGD 2006 . 2005 Aim To increase the availability of Carrefour-label products through centralising inventory for all private-label suppliers into a number of consolidation centres in Beijing. Source: IGD Research. Source: Carrefour. This has meant out-of-stocks of 10% on the shelves.Carrefour. and even offers backhaul options for those suppliers who are unable to deliver efficiently through its outsourced transport operation. 84 www. Shanghai and Guangzhou. which can be due to: • • • • Poor inventory management Demand exceeding production capacity Poor technology management Congestion in back-of-store operations.3. particularly for co-loading options. one of the biggest challenges is short deliveries.igd. and only 60-70% order fulfilment on the contractual delivery date. Wal-Mart therefore encourages its suppliers to use their distribution centres. International Differences and Emerging Markets Managing International Supply Chains After all. 2006 Case-Study . China Context Distribution of products in China is difficult because of the size of the country and the lack of sophisticated transport services.

P&G aims to provide value for money products. Source: Carrefour. • • • • • Results 100% on-time delivery to stores Inbound order-fulfilment increased from an average of 60% to 99%. • The stores order daily from the consolidation centres. will be key to long-term growth prospects for large. 2006 Case Study . 100% distribution in stores. and not just the wealthy minorities in those same countries. International Differences and Emerging Markets Process • These centres are all out-sourced and Carrefour fixes a minimum stock level per item. The company is also reported to have changed its consumer research methodology. and the supplier invoices each store monthly based on the quantities that have been delivered.igd. Improved promotional day-one availability. and is double what the company was spending just five years ago. 2005/IGD Research. but profitably. poorer consumers in China were willing to spend more time hand-washing clothes due to local water hardness.com/supplychain 85 . P&G found that there were cultural barriers in some countries like China that were just as relevant as economic considerations when trying to sell a new product concept like disposable nappies. leading international manufacturers like P&G. Focusing on the world's fastest growing shopper segment . • The inventory belongs to the supplier. Sustainable relationships with large developing markets like China. Moving from focus groups to 'within the home' studies. the P&G invests approximately one third of its annual research and development (R&D) spending on low-income markets. and so P&G now produces a detergent without water softener. which equates to over £1billion. its R&D techniques. that are as affordable as basic food items.Procter & Gamble.Managing International Supply Chains 3. Inventory reduced from an average of 55 days to less than 20 days.low-income families in developing countries . such as nappies. In order to deliver that strategy. and that certain low-income consumers want different product characteristics. and its global production systems to make products cheaply. thus reducing costs but still meeting the consumer's primary needs. but it is equally important that they connect with the lower income bracket household. Brazil and Russia. China Procter and Gamble has recently uncovered a key trading strategy. For example. © IGD 2006 www.

Source: The Financial Times.This global reach means that wooden furniture.igd. as well as ability to react quickly to changing circumstances. be crafted in Vietnam. it is no surprise that companies are looking much harder at their supply chains. Source: Auchan 2005/IGD Research. companies are also having to ensure reliability. and India has focused on home textiles. could have the wood imported from Brazil. It is important to have a clear picture of total supply chain costs before deciding which elements of production to re-locate. 2006 3. A large. this is an attractive option for many companies.3.2. 4. but also India. The market for prime materials is already global. With more and more goods travelling longer distances. Cutting the cost of sourcing nappy manufacturing lines by 30% compared to 2002. Thailand has looked at food and plastic products. and in times of consistent margin pressures. High local growth .New markets expand at a quicker rate than more developed markets (China +8% growth compared to the EU average of +2%). 15th November. Lower wages 2. but then sold into the EU. 2006 3. quality and service levels. Buying directly from the factory on an 'ex-works' basis could bring a margin bonus of anything from 10-50%. For example whilst China has focused on garments. 2005/IGD Research.2 Opportunities in Global Sourcing The main benefits of transferring production to these countries are: Opportunities for Global Sourcing 1. providing a much greater return on products. flexible and well-educated work force 3. the challenges that international sourcing present are real. including 'premium' countries. garments and decoration. making P&G more effective across all markets. and countries have specialised over time so that companies must act global to reach every production zone.3 Challenges for Global Sourcing In contrast. although the costs of transferring production to these countries can be relatively low. 86 www. hardware and electrical goods. for example. shoes.2. P&G has combined its proprietary technology techniques with a network of lowcost suppliers across not only China. International Differences and Emerging Markets Managing International Supply Chains Innovation and manufacturing productivity are viewed by P&G to be just as important a part of delivering to lower-income markets. Although total end-to-end supply chain costs remain a key area of focus.com/supplychain © IGD 2006 . Vietnam and Brazil. and with shelf-life for some high-tech goods now as little as six weeks. 5. This ensures an efficient technology base which feeds a more efficient production base.

igd. Whilst there is significant investment in road and sea-ports. compared to 2. and trucks account for about 35% of the privately-owned vehicle fleet. vi. © IGD 2006 www. entry into the inter-provincial haulage sector has been made easier. Consequently. Within China. with a total road network of four million kms by 2050 linking primary and secondary cities and eastern and western provinces.000km by 2008. Most freight operators are smallscale. rail and ports) International Transportation Inventories Communication and Planning v. both roads and harbours are set to expand rapidly. For example. However. Following deregulation. faster than the growth of China’s total freight market. due to modern vehicles only arriving since the late 1980’s with the first joint-ventures and technology transfer initiatives. ii. Tariffs are market-driven and privately-owned operators account for approximately 75% of the industry. and congestion in trade lanes.6 vehicles per 100 people. However. Infrastructure One of the major barriers to further economic and social development is infrastructural limitations. Subsequently. a. although again the government has announced plans for improvements. iv. 2006 i.com/supplychain 87 .Managing International Supply Chains 3. and in 2002 there were already three times more vehicles on the roads than ten years previous. most own their own vehicles. This growth was encouraged by the deregulation of the Chinese transport industry following accession to the World Trade Organisation. vii. moving product can still be difficult because of the vast size of the country. Road China’s vehicle fleet remains small compared to other countries in the region: 1. viii.3 in Thailand and 65.5 in India. The Chinese network is not able to provide consistent service for large amounts of commercial rail freight. rail is still a problem. with economic and social development. but as with the larger manufacturers. the demand for vehicles is expected to increase significantly. rather than the size of the truck.3 in Japan (Asian Development Bank statistics). According to Chinese Government figures. with major investment projects to improve transport links and reduce congestion to ensure greater efficiency. the varied topography. 14.1% a year over the same ten-year period. the motorway network is expected to expand to 35. iii. demand for road freight increased by 6. Administration and Payment Integrated Logistics Services Production and Quality Legislation Source: IGD Research. are inflating overall transport costs. despite a highly developed environment in major industrial centres (Pearl River and Yangtze River deltas). the challenges of rapid growth are being met head-on. new road tolls and licence payments according to the size of the load. International Differences and Emerging Markets Challenges of Global Sourcing i. and the inconsistent transport networks. Infrastructure (road.

3 billion of loans. and in some circumstances it may well cost just as much to move a truck from Madrid to Brussels and to transfer a 40 foot container from Shanghai to Antwerp. and the packaging type and standards. where development has been slow and poverty remains high. This means that importers should consider: the total ordered volumes and phased quantities. and two thirds of these are now also being built in China (Source: Auchan.5 million new containers being built per year. 2005). companies such as the Home Improvement retailer B&Q now import closer to their RDC’s. there is a need for greater understanding and awareness between users and suppliers of water transport. and infrastructure constraints. the packing.1 billion and the Asian Development Bank (ADB) $5. The global container fleet capacity is already expected to increase by over a third from 6. whilst Hong Kong is expected to increase from 17 million TEU’s in 2000 to over 25 million. be delivered in a few months and be in service for seven years. efficiently and at low cost. The exceptions include relatively low levels of air freight and the channel tunnel. which is not always advisable due to the number of secondary journeys that would then need to be undertaken. which will take Truck Equivalent Unit (TEU) capacity from 4 million in 2000 to 20 million by 2015. and within the UK. In response to such growth predictions. for example.com/supplychain © IGD 2006 . Shipping product half way around the world means that companies also need to ensure optimal shipping loads i. that containers are as full as possible. fuel costs. Despite pressures on the industry in terms of labour. it is right to point out that in terms of investment costs and timescales. planning and policy development. it is equally important to minimise the inland transportation where possible.3. b. but will be operating for twenty years (Source: Chartered Institute of Logistics & Transport (CILT) figures). Shanghai. who have been viewed by some as being too slow to react to business needs and a little archaic. 88 www. instead of using the traditional ports in the south of the country.6 million at the end of 2004 to 9 million by the end of 2007. and most major retailers now rely on it for primary (supplier to retailer) supply chains. companies become more reliant on various modes of transport to move product around the globe quickly. legislative pressures. International Differences and Emerging Markets Managing International Supply Chains Various development agencies are working with China to provide loans for construction. has been building a new port. International Transport By producing in countries such as China. or at least at ‘break-even’ point. Ports Water transport plays a key role in international sourcing. For example.igd. This avoids putting a warehouse actually at the port. ports in the Far East are at the forefront of capacity development programmes. the World Bank has provided $6. there are 1. a new container vessel costs upwards of $100 million. Western and Northern regions of China. as well as technical consultancy. there are significant differences between road and water transport. In time-pressured supply chains. ii. However. often by choosing the closest port to the final destination point. Within the importing country.000. UK ports handle 96% of volume and 75% of value of all goods moved into and out of the UK. So far.Whereas a new truck may cost $120.e. particularly in the Central. takes two years to arrive. Interestingly. the overall costs of international transport have been falling.

combined with streamlined communication. shared-user. Airfreight can sometimes be an option. Inventories The cost of capital. collection services. high average stock holding of core lines of 8-10 weeks stock cover and more is not uncommon for globally-sourced products.com/supplychain 89 . Equally. allowing for a degree of customisation and reactivity. with container shipments taking five to six weeks on the water. New technologies for product lifecycle management. Despite often disparate organisational structures. To counteract insecurity of supply. iii. but for low-value goods. storage and obsolescence are key factors to consider when sourcing globally. It is also important to have accurate phasing of deliveries. Communication and Planning At the heart of any global sourcing strategy is a need for greater communication between partners up and down the supply chain at all parts of the process. safety stocks are often increased. As such.Managing International Supply Chains 3. iv. particularly in terms of inventory levels and ability to react to changing circumstances. © IGD 2006 www. Longer lead-times means that inventory levels need to increase to cover sales. and this needs to occur across various time-zones. sourcing. whilst accurate forecasting.igd. this could cancel-out any savings made from producing in an emerging economy. particularly of seasonal lines. This is shown in the Zara case-study in Chapter One. and ensure that the receiving warehouse is able to take-in the goods at the right time. International Differences and Emerging Markets Finally. and there are efficient means of managing inventory commitment through various buying terms. so that experienced importers will ensure that arrangements with freight carriers are made early in the year for any peak seasonal activity. is always a challenge. logistics. it is true to say that interest rate levels are historically low in many developed markets. cultures and languages. outsourcing to a third party logistics provider with a vendor-managed inventory program can bring crucial benefits in avoiding inventory-build-up and obsolescence issues. whereby basic manufacturing processes are carried out in the lower cost country. manufacturing and inventory planning must align themselves to the strategy. sourcing companies must consider the implications of increases in transit time. as port demurrage and overflow warehousing can be very costly. For example. thus reducing order cycle times. and consolidation centres. but then finishing processes are done closer to the main market. teams from sales. particularly of seasonal lines. Poor planning is a key factor in increasing shipment costs. at a very basic level. Some companies also adopt a 'postponement' strategy. Companies should aim therefore to employ 'lean' strategies to avoid the build-up of inventory at the increased number of storage points that international sourcing brings to the supply chain. can ensure that production can make changes in design and demand quickly.

• Whilst companies can disappear as often as they are created. port loading. 90 www. geographical and logistical barriers.com/supplychain © IGD 2006 . • Equally. and the accurate weight/number of packages. it becomes even more important to find a partner that can eliminate language. assisting companies expanding from coastal cities to the interior. integrated service. managing collection at origin. Shipping documentation has to be accurate. including all documentation and queries.3. quality and service level. vii. many of which are also state-owned. price. Global sourcing also requires knowledge and expertise of international buying terms and payment types. Integrated Logistics Services In terms of logistics operations. as non-compliance can lead to severe delays in transportation. it is important to be vigilant and to even be wary of over-commitment to a given company. in October 2005. and many companies now working in China without a local partner.igd. under-developed and often bureaucratic market. In order to help manage the longer and more complex supply chain. • As factories are often over-loaded with orders. there is a heightened level of administration involved to ensure that long-distance trading partners and local associates are all kept aware of developments. It has been reported that the Importers and Distributors are fighting back. Production and Quality With most of the large multiple retailers now sourcing from the Indian sub-continent and South-East Asia. particularly prior to shipment. which brings associated costs and inherent risks. discharge and final delivery. many foreign companies still choose a joint-venture option. as well as the wider East Asia region including Hong Kong and Taiwan. Despite wholly-foreign owned enterprises now being allowed by the authorities. and this can be coupled with power and labour shortages in some regions. delays are also commonplace. • Since it can be a challenge to find suppliers who can conform to international quality standards. correct commodity codes. including the impounding of goods. vi. Key areas of focus for completing documentation correctly will include: declared value of goods. The joint-venture partner allows the foreign company to gain improved operational knowledge and expertise in a highly complex. shipping. once the selling price has been agreed. Exel had 22 locations across China. local firms still dominate in China with around 80% of the market. Administration and payment As the supply chain extends. International Differences and Emerging Markets Managing International Supply Chains v. and being experts in limited product range. some acquire factories in their core businesses to ensure continuity of supply. • It would not be uncommon for the customer who promises to pay the most to get the product. there is increased competition for product. quality has to be constantly checked. For example. despite agreements to deliver to others. there is certainly a growing role for third party logistics service providers who can offer a truly end-to-end. for example Southern China.

© IGD 2006 www. both in terms of exit from the producing country and entry into the buying country. allowing for direct contact with the factories. Case Study . There is also an agreement – the Closer Economic Partnership Agreement (CEPA) .Auchan Group. it is important to keep on top of developments. In this way. the products are only touched by the manufacturer. Legislation Customs regulations are the most obvious obstacle for any company importing from an emerging market.This has allowed the Group to gain a deeper understanding of the opportunities and constraints of the market. • Locally-sourced products can seem a logical option in terms of cost and proximity to production. Auchan has chosen to manage locally all the supply chain partners. Auchan has immersed itself in the country of production. and the store at the end of the chain. In addition to customs regulations. International Differences and Emerging Markets viii. promotional merchandise from the Far East. International Sourcing Auchan Group's Imports/Exports team has implemented a number of solutions to ensure the smooth flow of mainly non-food. and through to erratic import taxes. EU customs are also highly active in investigating consumer goods imports. 1. • In the aim of protecting the European shopper.igd. and in the case of Auchan. and carrying out security and conformity tests.The distances travelled. In order to efficiently manage their supply chain. but value-add taxes can wipe-out any gains. customs regulations are relatively unstable and are often subject to interpretation. • From variable quotas. whilst being able to adapt to the culture and undertake direct negotiations with the supplier base. it is important to obtain correct operating licences and foster smooth relationships with Chinese government officials. Such close contact affords Auchan the ability to react quickly and efficiently to unforeseen events. for Hong Kong-registered companies to run wholly-owned operations in China without the need for a state-owned sponsor.com/supplychain 91 . to anti-dumping taxes. the quality inspection team in-situ.Managing International Supply Chains 3.between Hong Kong and China proper. On-the-ground presence in the production regions To source efficiently. A solid information system Information management is viewed by Auchan as the primary focus of global sourcing because accurate and reliable data is imperative to the efficient management of 4-6 month lead-times. the different time-zones and languages limit the frequency of direct contact between supply chain partners. the inspection companies and freight forwarders. 2.

com/supplychain © IGD 2006 . but if there is no radio it is only 2%. the various payment terms. The Finance team at Auchan. whereas if the same t-shirt was round packed (for enhanced in-store merchandising). employees and customers. Strong quality control and customs management teams As well as the laboratories and inspection companies. For example.000 units per container. Source:Auchan. Secondly. the currency coverage. Strong logistics and finance teams Auchan's logistics team manages the forwarding and transport operations. container loading. and this activity is two-fold: • Global sourcing requires multiple partners around the world and their remote activities need to be efficiently synchronised. and the multiple means of payment. and the associated administrative burden.igd. to carry-out in-situ inspections in the production regions around the world.3. including price and contract negotiations. from a customs perspective. Auchan uses third party inspection companies. including letters of credit and transfer payments. on the other hand. there would only be 24 units per carton. as well as products that satisfy shopper expectations and needs. service providers. and only 22. and handling processes and procedures. • Optimisation of the transport chain for cost efficiencies. Auchan views strong quality management as a key part in ensuring lead-times remain as reliable and as short as possible. 2005/IGD Research. International Differences and Emerging Markets Managing International Supply Chains Auchan uses an internet-based information system which is accessed by suppliers. 2006 92 www.000 units per container. Auchan has cited that an MP3 player with a radio may be subject to a 12% import tax.Tax and duty declarations and payments represent a significant part of the overall costs. thus 33. and their expertise is vital due to the variety of currencies. Auchan has quoted that flat-packing t-shirts can allow 100 units to be packed into a carton. the customs teams within Auchan manage the arrival of goods into the receiving country. that are an inherent part of the global sourcing process. and this ensures that there is no need for significant dedicated resource to manage the flow. Auchan's internal quality team manages the evolutionary nature of the regulatory framework that governs imports/exports. and as Customs have the power to block an import/export at any time. 3. Expertise in quality control and inspection guarantees compliant products. 4. works to guarantee efficient payment terms. it is important to ensure that errors are kept to a minimum. at 50% more cost in transportation. For example.

Managing International Supply Chains

3. International Differences and Emerging Markets

3.3 India – Retailing Opportunities

Key Points to Note

• The scale of the Indian market and the remoteness of much of the population
present a real challenge to both manufacturers and retailers alike.

• Current Indian legislation restricts multi-brand retailers from investing directly in
the market and opening their own stores. Those that are present have entered the market through opening cash & carry outlets.

• Due to the ‘unorganised’ nature of the Indian retail market, distributors and
wholesalers are key links in the Indian supply chain, with very little centralised distribution.

• The quality of the physical infrastructure in India is well below that enjoyed in
China, where government investment has been highly managed, but improvements are coming.

The scale of the Indian market can be summarised by the fact that there are approximately five million distribution outlets. The country has the second largest population in the world with just over one billion people, 50% of which are under the age of 25. With average Gross Domestic Product (GDP) growth of +6% over the past decade, India's consumer middle-class is expanding rapidly. As a result, India’s retail sector is set to rapidly increase. The challenge for any international manufacturer will be getting their product (and brand) out to the rural areas, in order to tap into the mass market. For the international retailer, the challenges are slightly different, mainly because Foreign Direct Investment (FDI) into the Indian retail scene is currently restricted. The Indian government has however just announced plans to ease the restrictions for single-brand foreign retailers to own up to 51% of businesses in India as long as they only sell their own brands. Currently, modern retailing is therefore not widespread across India. Subsequently, the 'unorganised' nature of the vast majority of the Indian retailing scene (97%), where most customers shop in local wet markets for fresh fruit, vegetables, meat & fish, and neighbourhood stores called 'Kiranas' for their dry goods, means that supply chain management in India is heavily reliant on hundreds of distributors.

3.3.1 Distributors These intermediaries purchase stock from the main branded suppliers, such as Heinz, L'Oréal, Unilever, or Colgate-Palmolive, and then deliver the range of products either direct into the retail outlets, or via the wholesale networks. Even within the limited 'organised' retail sector there are only a few direct deliveries into store by a manufacturer.

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3. International Differences and Emerging Markets

Managing International Supply Chains

Distribution Network in India

Sub-Warehouse

Manufacturer

Retailer Distributor Wholesaler Retailer Shopper

Source: IGD Research, 2006

Whether the retail outlet buys from the distributor or the wholesaler will depend on if they can get the full range of products they require from one single source.

3.3.2 Sales Field Force The distributor companies have a number of sales people who call on the retailers once a week.They conduct: the physical distribution of goods, and collect money from retailers for the goods. There are two distinct roles for the sales force: 1. Order-taking - the salesman will take an order from the retailer, which will then usually be delivered the next day 2. Direct sell - the salesman has a delivery vehicle, and sells directly to the retailer from the truck. This is particularly common in smaller towns The type of role will simply depend on the viability of the method, in terms of ranging, volume and even ease of access to the retail premises. It is not uncommon for manufacturers to have their own field sales force. Due to the lack of modern media coverage, direct contact with customers in the more rural areas is essential for building brand and product awareness. The retailer will often receive seven days' credit before they have to pay the distributor for their stock purchase. Retailers and suppliers are not tied to a particular distributor, but can choose these freely.

Choosing a Distributor When choosing a distributor, a manufacturer would be looking for the following qualities:

• Financial security • Ability to serve the fragmented retail structure • Influence in the region/city, driving new business opportunities
Source: IGD Research, 2006

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Managing International Supply Chains

3. International Differences and Emerging Markets

The need for high delivery frequencies - due to little storage space - means that the local distributors are often essential to the continuous supply of goods. Although there will be some direct delivery accounts to the more developed retail stores, typically, an average retailer could be serviced by 30-40 distributors carrying the manufacturers' brands. This complexity impacts on delivery waiting times, which can be anything between four and six hours!

3.3.3 Legislation The manufacturers sell on a 'cash and carry' basis, where the distributor pays up-front for the stock they take. Suppliers will usually have a Carrying & Forwarding Agent (CFA) in each individual state to manage the sales to distributors, paperwork and the tax implications. Generally, there is a tax applied by the central Indian government when products change ownership and are sold into another State. This means that suppliers will generally move product from their centralised production facilities out to any number of out-lying co-packing/storage facilities, or sub-warehouses (usually one per State), where stock will then be sold to the distributors. Since ownership of the merchandise has remained with the supplier, there is no tax penalty on the physical movement. The only exception to this type of network structure is if the costs of running the out-lying warehouse are greater than the 4% sales tax that would be imposed. Implications Optimisation of warehousing within the Indian supply chain, with a degree of centralised distribution, will only really be viable when the tax burden for moving goods between States is abolished. This will not only allow large-scale manufacturers to consolidate their networks across geographies, but also consolidate demand and supply flows into the retail network.
Source: IGD Research, 2006

In addition to 'movement' taxes, there are a number of other financial taxes and laws which add complexity into the system: i. Maximum Retail Price (MRP) - Each product sold in India is required to have its MRP stated on the packaging and it is illegal for the product to be sold above this price. This price is set by the manufacturer and serves two key purposes. Firstly, it ensures that the consumer is not over-charged for the product. Secondly, the price determines the level of tax collected by the government. Retailers can sell below the MRP, although this is difficult because margins are generally very small. ii. Weights & Measures Act (1977) - which stipulates manufacturer pack sizes, so that the consumer can compare, and which product categories can attract tax on top of the MRP. Most products already have tax included in the price.

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International Differences and Emerging Markets Managing International Supply Chains iii. and with many available jobs. The wholesale network can be used. compared to more developed markets in Europe. • Low product/brand visibility.5 National Brand Coverage India is undoubtedly a vast country. and even company heritage in some areas. Packaging .3. v. by suppliers to reach more out-lying areas. particularly those adapted to the lower purchasing power of the majority of the Indian customer base. and is helped by a better road network and lower real estate prices.com/supplychain © IGD 2006 . The south of India has been a traditional entry point for companies. Strong brands are offered across much of India and into the majority of rural locations. Minimum Wage . or some suppliers only run multibuys in banded packs. effective inventory management can be a real challenge for the supplier and retailer in servicing the end shopper. local consumer preferences. For this reason. • Customer needs to know what they want. v. Mumbai itself supports a population of over 16 million people. Ingredients .igd. particularly for new product launches. It can change every six months. iv. people are open to change employment. consumption will be fragmented. Value-Added Tax (VAT) . Source: IGD Research.3. 3. and whilst the whole country is populated.Manufacturers need to ensure that price promotions are marked on printed packs (cross-out packs). 96 www.The biggest challenge for suppliers is to generate new products. but full coverage will depend on the geography.this was introduced in April 2005. There is high demand for skilled labour. as otherwise they could pay tax on the full sales price.there are a number of legal requirements for ingredient lists on products. but only 20 of the 29 Indian States accepted its implementation.3.This is set by region and by profession by both the national government and the state. although still account for a relatively low proportion of total costs. 2006 3. This means there is pressure on wage costs. at a price. and is a common rate across the country.4 Inventory Challenges Due to the complexities in the Indian physical supply chain. promotions are often run nationally. whilst also abiding by the legislative restrictions. Inventory Challenges Description Result • • • • • Crowded back-of-store Difficult to check Improper rotation Damages Low levels of self-service • Low stock visibility • Availability will generally be poor.

and has received much government investment due its capital city status. general congestion makes movement of goods very difficult between cities and regions. Subsequently.3.Managing International Supply Chains 3. hence another reason for the proliferation of warehouses across states. Many companies have moved out of the city centre into the 'greater' Delhi geographic area where development parks have been created. the extent of global sourcing activity. and it is reported that 70% of people living in the city are government officials. wider roads. Modes of Transport • Road transport predominates.The logistics sector is not restricted and so many foreign operators have moved into the Indian market.6 Infrastructure Challenges Despite similarities with China in terms of country size. quality of trucks. and the real challenge now is getting products into the rural interior. As highlighted in the previous section. as India looks increasingly to Europe and USA. has a Metro. infrastructural and investment development in China have been heavily managed and controlled by the Chinese State. 3. It is also a government centre. large quantities of food do not reach the market. bringing high levels of uncertainty into the supply chain.3. © IGD 2006 www. The city has bigger. International Differences and Emerging Markets 3. making sure that a certain degree of infrastructure was in place before inviting FDI. population. 2006 3. As with China.8 Supply Chain Improvements It is therefore fair to say that vast improvements have already been made. Delhi. and can be supported by a government agency (CONCOR) Source: IGD Research. road and rail infrastructure. and is cleaner and less congested than Mumbai. This has not been the case in India. this often occurs via jointventures. and landing rights are very expensive for aeroplanes • Rail is used for container traffic. Transportation. has more available space due to its circular structure. The relatively poor infrastructure means it is better to store goods closer to the market. in contrast. There is strong demand outside the major city conurbations. despite the inadequacies of the network • There are no domestic cargo airlines.com/supplychain 97 .3. it can be argued that India is approximately five to ten years behind China in terms of the modern retail environment and supply chain infrastructure.igd. where space. and their rapidly developing economies. giving time to adapt to the new market and learn how to do business in this complex developing market. congested roads and limited space. Mumbai remains the commercial centre of the country.7 Delhi versus Mumbai Despite having legacy infrastructure across the seven islands that have been joined through land reclamation. transport and retail planning and building continues to be rather haphazard.

This has taken the form of multi-lane highways. such as EDI. in transport and in-store. Return-on-Investment will not come immediately. thus reducing traffic congestion and journey times considerably. For example. there are clear signs that the sector is on the brink of significant change. Implications 1. import/export tariffs have been lowered. and have adopted their business processes to the cope with the complexities of this highly fragmented market. where there is a tendency to turn off refrigeration. It is widely anticipated that the retail market will continue to open up to foreign direct investment over the next six to eighteen months which will lead to the entry of international retailers such as Wal-Mart and Tesco. For example the use of temperature monitors inside refrigerated vehicles. The Indian government has encouraged private investment in the transport infrastructure.3. 3. Those that dominate the market have been in India for a long time. Current rules on retail FDI may well change further over the next six to 18 months. 2. the network of distributors and wholesalers will continue to dominate the market. Those who take the initiative to develop efficient logistics operations will inevitably gain the competitive advantage. but recent changes only apply to single-brand retailers. Sufficient investment is however unlikely to take place until the largest retailers have adequate scale to justify the cost. One of the biggest challenges is the cold chain. 3.5 hours.3. IGD anticipates that in the short to medium-term. or looking to invest. the 160km journey between Puna and Mumbai has reduced from 4-12 hours to only 2. The development of the retail sector is intrinsically linked to the development of the supply chain which currently requires a significant level of investment from both the State and private sector. and some leading companies are willing to pay for that security and quality.com/supplychain © IGD 2006 . As the market develops and the expectations of modern retailers and suppliers increase. Retailers and manufacturers expect international logistics service providers to reduce uncertainty and manage the supply chain safely and efficiently.igd. which helps bring a level of certainty to the supply chain. There has been the introduction of road tolls too. in India need to be patient. International Differences and Emerging Markets Managing International Supply Chains Customs procedures have been modernised. thus still restricting entry for most large-scale international retailers who sell many brands. and be prepared to 'sit-out' the current market complexity. 98 www. an element of consolidation is inevitable nevertheless. and can also help reduce labour costs because deliveries take less time. as well as the introduction of technology. Many leading international manufacturers find the Indian market very challenging. and so companies investing.9 The Future Whilst the Indian retail market is still in the early stages of development.

despite foreign supermarket chains creating 160. shorter lead-times for delivery into Western Europe when compared to their Asian competitors. a combination of political and economic changes over recent years has lead to surges in activity in once more remote countries. as a result of significant political change.4. or is being outsourced to contract manufacturers already established in the region. inter-modal activity and investment in transport and warehousing infrastructure. both between suppliers and with retail customers. 3.igd. the countries of Central & Eastern Europe have also become attractive places to invest. as shown by Poland's recent opposition to further hypermarket growth. a culture for hard-work. like Poland and the Czech Republic. but without the long transit times for delivery. Combined with generally positive government attitudes to foreign investment.000 jobs in Poland since the 1990's. are that they benefit from cost-effective labour and a culture of hard work. It is fair to say though that it is not all 'plain-sailing.Managing International Supply Chains 3. and the subsequent high levels of economic growth. the Czech Republic and Hungary. International Differences and Emerging Markets 3. Production capacity is also moving eastwards. and continued strong economic growth. • Consolidation in the supplier base is encouraging more collaborative practices.The growth of the European Union has accelerated the presence of leading consumer goods manufacturers and retailers in countries in Central and Eastern Europe. At a European level.com/supplychain 99 . all are believed to benefit from cost-effective (as opposed to cheap) labour. and above all. • There has been growth in logistics movements.4 Central & Eastern Europe – Supply Chain Restructuring Key Points to Note • Similarly to China and India. © IGD 2006 www. Central and Eastern European countries are an attractive emerging market. in terms of both manufacturing production and international retail expansion.1 Supply Chain Advantages Whilst some of the countries in the wider region are now part of the enlarged European Union. • The advantages of countries such as Poland. (sometimes with attractive subsidies).

The group has announced plans to double its number of stores over the next five years.the world's second biggest chewing gum company with 26% market share . air. Cadbury Schweppes . and move production to Eastern Europe.4. citing the need to invigorate production capacity and cost costs. there have been major up-lifts in port activities throughout the region.3. as well as plans for taking another four stores in Slovakia.2 Supply Chain Trends As more cost-effective manufacturing locations are identified. The site will be operational by 2008. with plans to open its first outlets in 2007. In response to the ever-growing trend towards global sourcing and the level of direct imports from Asia. sea and road freight throughout Europe continues to grow. 2006 3. adding to the seven stores it currently operates.has announced plans to close their factory of 40 years in the north of the UK. Carrefour currently runs approximately 100 stores in Poland. particularly in Odessa (Ukraine). particularly via accession countries: • Polish suppliers have been transporting more goods to Greece than their traditional German markets • Hungary is moving large quantities of products up to Poland and the Baltic States. In contrast. 100 www. from the historical east-west axis to increasing levels of north-south activity. Constanta (Romania). • Source: IGD Research. Following its expansion into Slovenia.igd. the German discounter Aldi has decided to move into Poland. Auchan has announced plans to open a further five hypermarkets in the Moscow area of Russia. particularly in smaller towns. and into Turkey. There has also been a reported change in the direction of goods movement. there is increasing demand on the responsiveness of the supply chain.makers of 'Chewits' sweets . The French retailer is taking over Tesco's six stores in Taiwan. partially in response to developing fashion and home improvement markets in former Communist countries. including 12 hypermarkets bought from Ahold last year.will invest £70m in building a new chewing gum factory in Poland. International Differences and Emerging Markets Managing International Supply Chains Examples of Central & Eastern European Growth Retailers • As part of their 'asset-swap'. As such. and modern retailing grows in a larger consumer market.com/supplychain © IGD 2006 . Trieste (Italy). • • • Manufacturers • The confectionery firm Leaf UK . Tesco has recently acquired 11 stores from Carrefour in the Czech Republic.

a number of challenges to overcome. Henkel (a leading manufacturer). not least of which are the years of under-investment in the transport infrastructures. With a multiformat operation. through restructuring their business model. m.ft. IGD Research 2005 Market Summary Tesco entered Hungary through the acquisition of ‘Global’ and currently has nearly 70 stores with a sales space of 3. Hungary Tesco.’ Delivering a Supply Chain The development of their store network is supported by a growing supply chain which has been steadily moving from suppliers delivering stock directly to store towards a centralised distribution model.igd.000 sq. The following three case-studies show how Tesco. Case Study . which will help off-set higher labour costs.com/supplychain 101 . Tesco is the clear market leader in Hungary and is the only international retailer that has full national coverage. Hungary (outskirts of Budapest) and has a total store area of 16. Again there are regional differences. Hungary. it has established hypermarket and supermarket operations and recently has extended into smaller urban areas through the development of compact and petrol station formats. Similarly.Tesco. and working closely with the local supplier base. with countries like Hungary and the Czech Republic in a better position than poorer and larger countries like Poland. nevertheless. but new investment in all of these areas is rapidly improving the situation. and Carrefour have improved their supply chains in Central & Eastern Europe. © IGD 2006 www. International Differences and Emerging Markets There are. Hungary Source: Tesco. ‘Tesco’s largest store in Europe is located in Budaörs.Managing International Supply Chains 3.5million sq. The development of efficient and capital-intensive infrastructures will help ensure competitiveness through improved service-levels and shorter lead-times. warehousing facilities can vary considerably in quality. changing the flow of goods through the supply network. Budaors.

500 pick locations. fully radio frequency controlled warehouse. Tesco has steadily improved its supply chain in Hungary: • Centralised more non-food volumes (aided by the sortation system in • • • • • • • • Herceghalom Closure of an old site and opening of a new purpose built centre Centralisation of fresh food volumes Implementation of service level improvement programmes Extension of existing site to accommodate extra ambient and non-food volumes Completion of Electronic Data Interchange volumes (EDI) Bought depot management control in-house Controlling more product at source e.000 sq m. Tesco can reduce the amount of stock held in the back of store. fresh and chilled Across the past five years.g.000 pallets and 6.reduced number of errors Efficient .everything must be scanned Training . The fresh food DC in Gyal has resulted in 98% of fresh being centralised in 2005 Spotlight on Herceghalom Herceghalom was the first of its kind in Central Europe. Tesco can handle an additional 20.g. It has a capacity of 36.com/supplychain © IGD 2006 . Value of Radio Frequency Benefits Offered Stock movements recorded as it happens (real time) Fast . leading to improved consistency and availability of the product offer to shoppers.’ Through centralised distribution.response time is less than one second Accuracy .for hardware Dependency on system requiring first rate support 102 www. Making it one of the most advanced depots in Central Europe.000 sq m.000 product lines. 10.to enable technology to be utilised Maintenance .3. With the addition of a cross dock sorter. moving from a locally sourced model to a internationally sourced model for produce. no picking lists Mobile . 43. having been developed within nine months and opened in June 2002.paperless processes now in place e. It changed from a paper based warehouse operation to a ‘state of the art’ paperless. non-food • Gyal. Its current network comprises of the following depots: • Herceghalom.igd. With a capacity of two million cases it has led to 75% of its grocery volume being centralised as well as 50% of the hardline items. International Differences and Emerging Markets Managing International Supply Chains ‘Our objective is to centralise 80% of all product volume by the end of 2006 and operate as a profit centre. ambient (dry grocery and hardlines) • Budafok.can be used all over the warehouse Challenges to overcome Following less flexible processes (need to more prescribed for RF) Discipline . 25. This enables simpler operations and better in-store processes.000 sq m.

Secondly. Henkel CEE has reduced inventory levels by 50% within two months. Henkel has a headquarters production site in Vienna.com/supplychain 103 . supply procurement and sales under one single management structure. The Challenge Following a decision to put production. As part of a ten-year supply chain restructuring programme. International Differences and Emerging Markets Future Outlook Overall Tesco has made great strides in applying best practice into new markets and Hungary now has some of its most up to date depot networks.000 people and achieves 85% of its total turnover in Central and Eastern Europe. The ability to re-structure the business in such a radical way was also helped by the small size of Henkel's CEE business. Tesco has been successful in implementing centralised distribution within a country such as Hungary – but what about across Central and Eastern Europe? Across 2005/2006. Going forward the two key challenges facing Tesco are finding the right model for international/global sourcing.Henkel in Central and Eastern Europe The Business Within Central and Eastern Europe (CEE). relative to that in Western Europe.igd.Managing International Supply Chains 3. the operation has advanced 15 years in the space of 18 months. This transformation has made Henkel CEE the number two detergents player and market leader in adhesives and hair cosmetics in Central and Eastern Europe. • Poland – Opened a fresh food depot in 2005 • Slovakia – Opened two depots in 2005 • Czech Republic – Plan to open two depots in 2006 With ambitious international expansion plans. Henkel CEE now employs over 7. centralisation of product volumes across a region. process-orientated. Source: IGD Research and Tesco. Reduced cost per case has been driven through transport efficiencies through better economies of scale. Central and Eastern Europe is seen as a key element to support this strategy and Tesco will continue to invest in a first class distribution infrastructure. this will in turn define the supply chain infrastructure needed. © IGD 2006 www. which has included a €448m investment in the region. 2006 Case-Study . Tesco has embarked on the development of distribution depots across Central and Eastern Europe. end-to-end supply chain approach. In Tesco UK terms. These immediate benefits acted as a catalyst for wider business support for the rest of the re-structuring project. through an integrated.

Whilst Henkel wants to be able to flex its purchasing power by using smaller companies. location and quality.With this in mind. Henkel CEE aimed to open its first cross-national warehouse. with Henkel CEE producing materials on their own. well-managed supplier-base. Key areas of focus include: inventory management. and so Henkel has created a mixed system in the region. In this way. creating supply regions based on shared consumer behaviour. production facilities were often acquired by chance. shopper behaviour can vary. believes that companies who have sought multinational organisations who can offer global supply have re-shaped the market. Henkel CEE relies on a proactive. Vice-President Supply Chain Management Henkel CEE. Henkel CEE continues to face logistics. In this way.This has not always been possible.com/supplychain © IGD 2006 .3. With high revenue growth in countries like Russia. and wants the supplier relationship to be strong. so that negotiations around service can be productive. so that production and warehousing are placed together. it is not a key focus for Henkel. thus creating a certain degree of supplier concentration. Supplier Consolidation Acquisitions of suppliers have also been strong within the new accession countries. In terms of management of excess supply chain stocks. and also introduced new systems and new demand planning tools to establish supply chain priorities. Although internal integration from plant to the customer to deliver efficiencies is the primary focus. who prefers to focus on technology-based tools that can simplify the processes of dealing with many suppliers. but are not in a position to manage all the technology systems. there is talk of more vertical integration. as the business must continue to function. Henkel CEE aims to move from a country-level organisation to regional clusters. where there are three detergent production facilities.The concentration has changed the balance in purchasing power. there is now a clear long-term vision to review this network. especially with some local suppliers who benefit from good location and good prices. at the end of 2005. but a responsive service-led supply chain is at the heart of the new approach. supplying four countries from one single location. In the past. Supplier Collaboration As part of their supply chain re-structuring programme. Henkel CEE has not actively sought to reduce its supplier base. Although products and brands can be common across many markets. sales and marketing challenges due to the size of the country and the deficiencies in infrastructure. where service is said to be more important that price. it is accepted that closer collaboration with competitors will be of greater importance in the future. Network Restructuring With 19 warehouses and 10 production plants in the Central and Eastern European region. despite a strong push within the industry. close communication. and the warehouse location was determined by price. Henkel CEE wants to use suppliers capable of vendor-managing their relationship. International Differences and Emerging Markets Managing International Supply Chains Henkel CEE changed more than 50% of the management structure to ensure the new team supported the radical new plans.The change process is slow.Whilst it is accepted that a more focused supplier-base can bring advantages.igd. leaving only suppliers who can handle the huge volumes involved. it does not want supplier dependence. Competitor Collaboration Johann Seif. or in collaboration with competitors. 104 www.

Masterfoods and Cadbury. Source: Interview in 'Supply Network'. Carrefour wanted to move from individual direct 1-to-1 picking flows to a 3-to-1 cross-dock flow through a common warehouse. • One range of fast-moving products from Masterfoods has remained in pick to ensure full-truck optimisation.Carrefour (Poland) Multi Cross Dock The Business There is only one Carrefour warehouse in Poland. but also ensuring quality service. there is a requirement for total supply chain flexibility. Henkel CEE requests invoicing once per month. Henkel CEE has reduced its production cycle from one month to only two days over the last five years. June 2005/IGD Research. Western Europe Breaking down block structures working within national boundaries will now be the focus for re-working the business in Western Europe. with twice-weekly planning.FM Logistics .com/supplychain 105 . © IGD 2006 www. As processes are simplified and transparency increased. borders will be opened further. The Process • Following 3-4 month negotiations.igd. with a 24-hour supplier response. whereas other lines are being cross-docked. This would not be possible without complete supply chain visibility.Managing International Supply Chains 3. International Differences and Emerging Markets Supply Chain Visibility & Flexibility In a promotionally-driven market. • Both warehouses are managed by the same logistics service provider . as production cannot work to standard delivery times. With limited detergent sales growth expected in Western Europe over the next year. • Orders are picked for cross-dock and then pooled for delivery to Carrefour's distribution centre. Henkel CEE now plans to outsource the making of promotional materials. putting pressure on Henkel's own supplier-base. 2006 Case Study . even more emphasis is placed on improved supply through leaner structures and greater synergies. including the location and number of both production and warehouse facilities.for the three suppliers involved in the project: Danone. receiving many direct deliveries from suppliers and so Carrefour wanted to combine orders to optimise truck fill and reduce inventory at the Carrefour warehouse. and Henkel CEE aims to give suppliers full access to their production programme. In exchange for this level of integration. instead of per truck delivered.

• Total inventory (RDC and stores) has reduced by 40%.igd. International Differences and Emerging Markets Managing International Supply Chains Results • Delivery frequency is identical for stores at five times per week.com/supplychain © IGD 2006 . • Total costs have reduced. 2005/IGD Research. 2006 106 www.3. • Out-of-Stocks (OOS) have reduced by 50% for two suppliers and remained stable for the third. • Truck fill rate has increased from 50% to 85%. Source: Carrefour.

industry bodies. including collaborative work between trading partners. there are differences between organisations. Process management is the most common method employed by the international companies surveyed by IGD. financial indicators. and inventory. transport. The production environment lends itself to process re-engineering techniques. • Finally. greater internal and external communication.Managing International Supply Chains 4. the key enablers for supply chain best practice are people and processes. but this should be done in a simplified and standardised way. and external consultancy firms. • There is a number of standardised continuous improvement techniques used across the food & grocery sector. such as ‘global’management roles. • Root cause analysis of good performance is most likely to be shared around a business via internal reporting methods and communication processes. particularly amongst the supplier base. In this way.com/supplychain 107 . Best Practice Supply Chain Management Summary • IGD’s international survey asked companies for details on their performance and best practice methodologies. Amongst others. • Transferring best practice across departments. © IGD 2006 www. service levels. companies most admired by the Supply Chain Executives included Tesco and Procter & Gamble.igd. • In terms of transferring best practice around the business. Improved use of data. Order fulfilment is the most common performance measure. markets and geographies is a key method for driving international efficiencies and improving end-to-end capabilities. forecasting. Best Practice Supply Chain Management 4. IGD’s supply chain survey asked companies to choose a best-in-class company – retailer. warehousing. supplier and service provider. through to more informal methods via multi-discipline project teams. order fulfilment. In addition. from more formalised methods engraved in organisational structure. • Key supply chain performance measures focus primarily on: availability. and focus on inventory management and forecast accuracy are all key factors in improving overall performance. there are a variety of other methods used by companies. total quality management initiatives and lean methodologies. in order to understand the diversity in measurement tools and the role of external information in bringing internal improvements. including the ECR Scorecard. • External benchmarking is gained primarily from the retail customer sharing information on cross-supplier performance. and is often based on order fulfilment and availability.

com/supplychain © IGD 2006 . The efficient and effective transfer of best practice throughout an organisation in an organised and structured way can be a key enabler for companies aiming to drive the large-scale implementation of best-in-class supply chain solutions.4. 108 www.igd. across departments and geographies. Best Practice Supply Chain Management Managing International Supply Chains One of the principal mechanisms for driving international efficiencies and supply chain leverage across markets is to ensure that ‘what works well’ is widely known and shared around the business.

late deliveries & delivery windows • Drop-size • % of direct delivery • Vehicle utilisation • Load efficiency • Distribution cost per case/m3 • Cost by kilometre Warehousing • Pick Accuracy • Pick Rates • Cost per case • Handling costs per m3 • Cost per pallet Other • All components of the 'perfect order' • SKU complexity • Waste/Write-off • Non-quality costs • Lead-time achievement • Time/Speed to market • Information efficiency • Distribution build • Cost of production of best quality product (which is different for different regions) General Financial • Supply chain costs as a % of net sales • Lost Sales • Invoice accuracy • First-time invoice acceptance • Low code sales • Cost savings • Cost per unit delivered • Cost vs. it is true to say that ‘on-time in-full’ and ‘case fill rate’ were the most commonly cited. inventory. customers and organisational structures of many international companies. 2006 Whilst some companies listed a number of major performance indicators – often across a wide range of supply chain links (availability. Although there will no doubt be many performance indicators used across any one business. order fulfilment and transport. warehousing and other. and measure the degree to which a given replenishment order has been completed and delivered. other organisations were more restrained in their response. The aim of this exercise was to examine the scale and diversity of the methods used across international companies to measure success and ensure the right balance between service and cost. Subsequently. forecasting. © IGD 2006 www. in response to the diversity of responses. cost Source: IGD Research. order fulfilment. service levels. Best Practice Supply Chain Management 4.Managing International Supply Chains 4. IGD asked the Supply Chain Executives to share the key performance indicators that are used for benchmarking purposes within each of their organisations.1 What Unit Measure of Performance Do You Benchmark? Recognising the diversity of markets. financial. volume vs. Supply Chain Performance Measurement Matrix Availability • On-shelf availability (OSA) • Items out-of-stock (OOS) • Stock availability • Supplier/Wholesaler availability by SKU Order Fulfilment • On-Time In-Full (OTIF) • OTIF (All costs) • Case fill rate • Order fill rate Forecasting Service Levels • Forecast accuracy • Customer service • MAPE (Forecast error) • Supplier delivery performance • Conformance to manufacturing plan • Service levels • SKU forecast accuracy • Sales forecast accuracy Inventory • Inventory management • Stock-holding • Stock turnover ratio/Forward weeks' cover • Working capital (Inventory values) Transport • On-time deliveries. and the complexity that this can create for the effective management of the complex supply chain. transport. in full to the customer. for example).com/supplychain 109 . IGD has grouped the variety of performance indicators into nine different ‘themes’: availability. These units of measure are specific to order fulfilment. turn-over • Profitability vs.igd. general financial.

When operating in a variety of countries. It is also important that the key performance indicators are aligned between both the supplier and retailer. 110 www. in the right quantities. 2006 Whilst accepting that certain commercial targets will differ both internally and externally to an organisation.igd. and benchmark performance across companies. if there is not transparency of expectation and clear communication of needs. and delivery timings/windows. or efficiency is much impaired. 1.4. Best Practice Supply Chain Management Managing International Supply Chains From rather generic units of measure – such as ‘service levels’ or ‘inventory management’. 2. Source: IGD Research. then it is essential for all parties in the chain to collaborate and work towards the same performance goals. it is essential for any company to be able to report on the same data. at the right price. and especially when using a number of different service providers. The first step to improving supply chain scale efficiencies across the international organisation will be to ensure that data is measured in the same way and that it is shared widely across all stakeholders. If the ultimate aim of the supply chain is to ensure that the endconsumer is able to purchase the product they wish. such as quality costs. then the supply chain will ultimately fail. and markets. and at the time of their choice. companies also cited very specific targets. Standardisation and Simplification IGD believes that one of the main challenges for improving supply chain management and driving greater efficiencies is for companies to be able to standardise and simplify their performance measurement both internally and externally. The emphasis on transport performance indicators highlights the strict focus within the food & grocery industry on reducing waiting times.com/supplychain © IGD 2006 . costs per case/unit/m3/kilometre. departments. and running the most efficient network. increasing vehicle fill.

com/supplychain 111 . so that the supplier can benchmark across their competitors. IGD asked companies to provide information on the external units of measure that help with performance benchmarking.Managing International Supply Chains 4. often in the same category. ‘case fill rate’. similar to supplier internal measures. © IGD 2006 www. Sometimes this information will be for several suppliers. but it is fair to say that some organisations do not use any external benchmark in their supply chain. are ‘On-time In-full’. Best Practice Supply Chain Management 4. 2006 • Nothing concrete .based in international experience • Tendering • In-market distributors • None The retail customer plays a key role in providing data to manufacturers on their performance. External Benchmarks Customer Industry Body/Expertise Other • Customer OTIF • External consultants x3 • Customer tables or service • IGD level reports. The most common measures. and various availability data. external management consultancies. The role of the retail customer.2 External Benchmarks In addition to the internal key performance indicators.igd. and other industry bodies play a key role in this process. comparing • ECR Scorecard with peers • ELUPEG forum (intercompany comparisons) • Retailer KPI's • Retailer availability data • Case fill rate (shared by retailers) Source: IGD Research.

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4.3 Availability
Due to increased complexity, the risk of a product not being available on–shelf increases as the product moves down the chain, closer to the end shopper. The challenge of the now infamous ‘last 50 metres’ will mean that often an ‘on-shelf’ availability performance measurement can vary considerably from the ‘in-store’ performance measure. To benchmark total supply chain performance for availability, it is important to make the distinction between warehouse-availability, store-availability, and on-shelf availability.

If the product is not making its way to the shelf from the back-of-store, then the whole supply chain is not performing to its best. Depending on the category, the shopper may well switch brands, postpone the purchase, or even change store, in which case both the manufacturer and retailer can lose a sale.

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4.4 ECR Scorecard
In terms of external benchmarking tools, the ECR scorecard was created for collaborative performance management, and is completed separately on-line by both trading partners against an agreed set of key performance measures. There is a vast array of criteria that could be used in a scorecard, and so it is important for companies to select the targets that are most business-critical to the relationship, reemphasising the point that it is important for both customer and supplier to be aligned in their benchmarking process.
ECR Scorecard Process

Source: ECR

Before approaching a retail customer with a collaborative scorecard, it is advisable for suppliers to become familiar with the technique and score their own business internally first. This ensures familiarity and clarity with internal performance weaknesses, which can then be improved, before being scored externally by the retail customer.

How do I implement a collaborative scorecard?

• • • • • •

Week1 - Meet between Customer and Supplier to explain the principles Week3 - Supplier completes scorecard on-line Week4 - Retailer completes its version on-line Week5 - Discussion over variances in ratings Week6 - Meeting to discuss the outcomes and business plan. Progress is monitored by setting 1,3, & 6 month targets for improvement

Please note the above timescales are indicative of the entry level scorecard. For more information, visit www.globalscorecard.net.

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4.5 How do you Analyse the Root Cause of Success?
As a result of the variety of methods of root cause analysis cited by surveyed companies, IGD has grouped them into three main types. Those based on reporting and communication, those that are more analysis-based, and other types.

Root Cause of Success Examples Reporting & Communication • Regular feedback sessions with cross-departmental discussions on performance measurements achieved • Monthly reports on changes (e.g. average number of deliveries vs. 'outers' delivered) • In-store availability (via the retailer) • Service levels, cost control, historic performance trends • Joint work with customers and between the various internal supply chain stakeholders Analysis Tools • 'Pareto Analysis' for all issues, solve the issues, and then start over • Scorecard • Break-down all links in the supply chain, and measure separately (e.g. product availability, picking errors, transport failures) • Visibility of real cost drivers and learning how to control them (Activity-Based Costing - ABC) Other • External consultants
Source: IGD Research, 2006

The most common methods for understanding the root causes of success, but also the reasons for failure, are based on communication and reporting of performance. It is vital for companies to share performance data and review what happened. It is only through reviewing the process with all stakeholders that further improvements be made.
Review and Share Performance Data 1. Data should be shared internally to avoid the negative effects of 'silo' mentality, where departments ignore the impact they have on other teams. 2. Performance data should be shared externally with the customer to ensure that performance targets and expectation are aligned.
Source: IGD Research, 2006

It is true to say, that in any planning process, it is often the 'review' stage that is delayed or forgotten, as businesses focus on the operational demands of the 'here and now', and plan for future activities.

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Improved communication Better utilisation of existing data Increased focus and effort Forecast accuracy (increase accountability for forecasts given) Inventory levels (exit strategy for ageing product lines. 2006 © IGD 2006 www. monitoring of stock levels) Source: IGD Research. 4.com/supplychain 115 . 5. 3. 2.igd. Best Practice Supply Chain Management How do you improve performance? 1.Managing International Supply Chains 4.

6 How Do You Transfer Improved Performance to Other Parts of the Business? Once best-practice and performance success has been identified. it is important for companies to be able to transfer that knowledge to other parts of the organisation. There is also widespread support for the use of multi-functional project teams and the rotation of personnel around the business.1 Formal and Informal Methods In addition to the methods listed in the chart.6. IGD’s international survey therefore asked companies about their current methods for performance sharing.igd. Methods of Performance Transfer 52% 48% 28% 26% 24% 15% 13% 9% 4% 0 10 20 30 Share of use Note . Best Practice Supply Chain Management Managing International Supply Chains 4.companies can choose more than one method Inter-company forums/conventions Participation in multi-unit task teams Rotation of personnel between units External conferences and presentations Organised periodic visits to other units Specialised audit teams Other Industry-wide databases of best-practice Newsletters/video-films 40 50 60 Source: IGD Research. up-date and exchange knowledge and information. 4. ‘other’ methods of best practice transfer range from formalised roles embedded in organisational design and structure. thus driving more integrated operational capability. where different parts of the business can meet.com/supplychain © IGD 2006 .4. 2006 The above chart shows that the most common method for transferring performance information and best practice is through inter-company forums or conventions. through to much less formal methods: 116 www.

Best Practice Supply Chain Management Formal & Informal Methods of Performance Transfer Formal Global Roles Some organisations have global roles. then improvements become visible to all geographies. teleconferences. Some organisations argue that if the business is managed at an international regional level (e. 2006 Although all of these methods will go some way in achieving best-practice transfer. and subsequent learning. These can be a very effective way of driving crossfunctional understanding and communication. the use of newsletters & videos and inter-departmental visits is relatively low across organisations. Multi-Functional Project Teams Informal Word-of-mouth Source: IGD Research.g. Interestingly.igd.The role of people in enabling best practice in the supply chain is discussed in the next section. with accountability for developing. and are equipping their people to improve current performance. initially only benefits the colleagues who were fortunate enough to attend the event. These can take the form of country visits. Reporting & Meetings Weekly or monthly reporting methods.but with no specific PR exercises. are used to share performance results and best practice solutions.Managing International Supply Chains 4. Collaborative project teams with the retailer customer can also ensure that strategic goals are aligned. intranet utilisation and best-practice presentations. and are essential for many project design and implementation initiatives. A key challenge for any organisation is how to disseminate important best-practice on a wider scale. and monthly steering committee meetings. spreading and training best practice solutions.com/supplychain 117 . Europe). meeting or be involved in the project. one of the criticisms against these methods is that the sharing of information. It is likely that a good mix of all of these methods will ensure that organisations are reaching as many colleagues as possible. Word-of-mouth . © IGD 2006 www.

delivery and transfer of best practice is key for most organisations. job transfer or project teams.com/supplychain © IGD 2006 . IGD’s survey asked companies to rank the ‘enablers’ of best practice within the organisation in order of importance. and data visibility with ‘one-touch’ processing are all mentioned. 4. 2006 4. whilst training.2 Process The importance of clear business processes is also viewed as an important enabler of best practice. open communication.4.7. choosing from people through to technology.igd. 118 www. Most best-practice techniques are peopleorientated. alignment of supply chain with the strategic direction of the company. Best Practice Supply Chain Management Managing International Supply Chains 4. as most are reliant on both colleagues and industry peers coming together to share information. events.7. Enablers of Supply Chain Best Practice People Process Training Clear Key Performance Indicators Technology External Business Examples Other 0 1 2 3 4 5 6 7 8 9 10 Ranking (low to high) Note: Companies can choose more than one enabler Source: IGD Research. In terms of ‘Other’ enablers of supply chain best practice. whether through specific job roles.7 Enablers of Best Practice in Supply Chain In contrast to the methods for transferring best practice and performance. clear performance targets and technology all play a supporting role.1 People It is perhaps of no surprise that the role of people in the creation.The preferred methods of transfer highlighted in the previous section support this view.

companies can choose more than one technique Source: IGD Research. as well as business modelling and simulation techniques. 2006 As a key element of just-in-time methodology.2 Total Quality Management (TQM) Many people in any given organisation will spend much of their time. This holistic. as they affect different parts of the supply chain. Total Quality Management (TQM). or indeed all of their time.1 Business Process Re-engineering (BPR) The most common continuous improvement technique cited in IGD’s international supply chain survey was the use of ‘Business Process Re-engineering’ (BPR) with 41% of companies saying they used it. provide workflow and process analysis tools. 4. Best Practice Supply Chain Management 4. 4. external continuous improvement and re-engineering techniques. and re-doing things. Technology can often play a key part in helping the organisation gather information about the current business organisation. dealing with customer service complaints.8 Continuous Improvement & Re-Engineering Approaches IGD asked companies to comment on their use of more structured. rectifying errors. aims to improve the effectiveness and competitiveness of a company by looking at the business as a whole.8. which is being used by 24% of companies surveyed.Managing International Supply Chains 4. and invariably involves a strong degree of worker involvement. In response to this reality. Errors have a way of multiplying. looking for errors.8. © IGD 2006 www.com/supplychain 119 . Use of Continuous Improvement Techniques 9% 20% 41% Business Process Re-engineering Total Quality Management (TQM) Lean Methodologies 20% Six Sigma Total Productive Maintenance (TPM) Other 24% 24% Note . continuous improvement means making many small improvements in business methods. formalised. As many respondents to the survey were from manufacturing companies. one would expect a number of production improvement techniques to be used by leading companies.igd. processes and products in a neverending quest for business excellence. customer-centric technique involves the analysis of business processes and the planning and implementation of improved processes across business functions.

or operations teams. production.igd. Best Practice Supply Chain Management Managing International Supply Chains TQM is a continuous improvement initiative that requires every activity and person of an organisation to work together to understand how they affect others.8.4.analytical processes to identify and implement longer-term improvements are not emphasised as much as they could be. 4. It is clearly ‘customer’ focused and organisations must ensure that the ‘front-line’ staff. (Source: ‘Production and Operations Management’. by helping different departments communicate more effectively. Prentice Hall. security staff or financial teams. it was also recognised that sometimes there was no formal process method used at all: “Whilst supply chain performance majors on operational excellence – above all customer service and minimising product wastage . Muhlemann. are included in any initiative. who are often the first point of contact for a customer. like telephone operators. bringing synergies with external suppliers and customers.).” – FMCG Supplier It is true to say that whilst many companies have transformed their entire production environment to become a 'lean organisation'. In addition. also receiving 24% of company votes.com/supplychain © IGD 2006 . Quality cannot remain the sole responsibility of the quality. structure and systems: • • • • • • Waste elimination Total Quality Management (TQM) Just-in-Time (JIT) Supplier integration Automation Team working & empowerment ‘Other’ approaches to continuous improvement mentioned by surveyed companies included internal training programmes on continuous improvement and strategy development. 1992. as well as driving continuous internal improvements. it looks at culture. Oakland & Lockyer. and how others affect them. 120 www. Equally. is an all encompassing philosophy based on the Toyota production environment. TQM is a method of removing waste. IGD believes the competitive edge is now firmly with a "lean supply chain".3 Lean Methodologies Lean Methodologies. Also taking a holistic approach to business improvement.

Managing International Supply Chains

4. Best Practice Supply Chain Management

4.9 Best-in-Class Companies
Whilst it is important for organisations to share information and drive best practice internally, through both formal and informal methods, it is also important for companies to look externally to other companies, and understand what they do differently that supports their success and position within the industry. In this way, IGD asked those companies surveyed to share their thoughts on those retailers, manufacturers and service providers who could be admired and considered as ‘best-in-class’ examples. It is fair to say that best practice can also be gained from companies who are not trading in the same sector, particularly in terms of logistics expertise, as the best performing supply chains are not necessarily those of one’s direct competitors.

4.9.1 Which Retailer Do You Most Admire?

Most Admired Retailer 39%

40% 30% % Vote 20% 10% 0%

21%

5%

5%

Tesco

Wal-Mart (inc. Asda)

Aldi/Lidl

Ikea

Name of Retailer
N.B. - The remaining percentage (30%) was made up of a mix of retailers from Carrefour, Dell, Inditex, Louis Vuitton, Marks and Spencer, Mercadona, Sainsbury’s and Waitrose. Source: IGD Research, 2006

Winning Characteristics for the 'Leading' Retailer 1. 2. 3. 4. 5. Growth (Sales & Profitability) Strong customer focus Integrated supply chain Distinct business model Strong collaborative relationships

Source: IGD Research, 2006

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4. Best Practice Supply Chain Management

Managing International Supply Chains

Tesco by far, with 39% of replies, came out top of the list of most-admired retailers. The continued sales and profitability growth, focus on the shopper, and clear strategy, is helping drive the success of the Tesco brand across international markets:
Name of Retailer Reason

• • • • • • •
Source: IGD Research, 2006

"Focus and will to win" "Continuing growth" "Business strategy - always one step ahead of their competitors" "Focus on the end customer and engineering the business to deliver most effectively against their needs" "Single-minded customer focus and continuity of strategy" "For its application of the lean methodology to distribution" "Both in service and cost - probably the most logistically sophisticated retailer in the world"

The second most-admired retailer in the survey was the international retailing giant that is Wal*Mart. With 21% of the votes, the global company has critical mass and focuses heavily on the use of technology and processes to increase the efficiency of its operations.
Name of Retailer Reason

• "Very efficient" • "Learns from mistakes" • "Their collaborative approach - engaging suppliers to want to
succeed together"

• "Flexibility of the supply chain, and integration of the supplier in
the supply chain"

• "They have incorporated technology as an aide to everyday •
Source: IGD Research, 2006

business, and they will help (the supplier) to achieve similar goals, by providing the information you need when you need it." "Very good model for end-to-end supply chain transparency"

A selection of retailers scored similarly, with 5% of the vote each, including the discounters Aldi and Lidl – who were often listed together and the non-food Swedish international retailing giant Ikea. There is a focus on brand clarity and supply chain excellence.

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4. Best Practice Supply Chain Management

Name of Retailer

Reason

• "Clear understanding of their existing customer-base, and have
successfully stretched their brand by innovative assortment, international expansion, exploiting the weaknesses of their fullservice retail competition, and have good long-term relationships with suppliers" "Most efficient, professional business model and cross-border implementation" (Lidl)

• "A distinct and unique brand in an homogenous market,
supported by logistics on a grand and effective scale"

• "Complete control of all parts from the trees to the use of pieces
of furniture in the home"
Source: IGD Research, 2006

There were a number of other individual retailers covering a selection of grocery, general merchandise and technology retailers from around the world, including Target, Mercadona, Inditex and Dell. This grouping also focused on the higher-end of the market, with retailers such as Marks & Spencer, Louis Vuitton, Sainsbury’s and Waitrose. Carrefour was mentioned as having the closest strategic and operational ‘fit’, in terms of market presence and logistics infrastructure.
Name of Retailer Reason

• "Market commonality and supply chain closeness" • "Completely reinventing the supply chain, enabling individuallybespoke products to be delivered with an incredibly short leadtime"

• "With its Zara format it has the shortest lead-times in the fashion
industry"

• "Profitable, desirable, crystal-clear profile, never on sale" • "For their simplicity" • "For their five mission definition and implementation - customer,
employee, supplier, society and capital"

• "Really turning things around, and are a pleasure to work with" • "Very strong business continuity planning" • "Profit without pillage"
Source: IGD Research, 2006

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with 30% of the vote. This apparent lack of recognition for some of the industry’s leading manufacturers could be due to the fact that there are more of them. the survey showed that success was much less homogenous than with the retailers.2 Which Manufacturer Do You Most Admire? When choosing a best-in-class manufacturer.9. even in developing markets in China. and that with the exception of Procter & Gamble. Best Practice Supply Chain Management Managing International Supply Chains 4. 4.com/supplychain © IGD 2006 . and brand development capabilities" • "Very proactive in many supply chain areas. means that P&G are viewed as being leading-edge and proactive in driving their business. Russia and South America. and clearly value it highly within the organisation" • "17 different countries/languages on the Swiffer pack!" • "Leading edge and scale in every market with very good shareholder value" Source: IGD Research. or a reluctance from the respondents (whom manufacturers form the majority) to accept that one’s competitor could be better than one’s own company. combined with supply chain scale in every market. or compared to relatively few large-scale international retailers. few other suppliers attracted several votes. That brand development. 124 www. 2006 Name of Supplier Reason • "Overall business organisation for customer management.4. 5.igd. 3. Winning Characteristics for the 'Leading' Manufacturers 1. Innovative Effective brand management Speed-to-market Excellent customer management Scale and agility of supply chain Source: IGD Research. 2006 The predominance of Procter & Gamble in the poll is perhaps not surprising when one considers the company’s impressive international presence and brand awareness. 2.

One can assume that this may be due to the variety of providers in the market.9.3 Which Service Provider Do You Most Admire? It is fair to say that there were not a large number of nominations in this category. but agile" • "Maintaining a very competitive supply chain. superb creation of a brand position suited to the modern trend for extreme sports. not the smallest. Best Practice Supply Chain Management Name of Supplier Reason • "Not the biggest. 3. youth excitement…enables it to command a brand premium" • "Good international supply chain. 2006 © IGD 2006 www. Winning Characteristics for the 'Leading' Service Providers 1. and their marketing success" • "Masters at managing differentiation and complexity" • "(I) like the business ethics and marketing" • "Always a first-mover in relation to high ethical standards in toys" • "They have turned their market around and are innovative in every way from product through to packaging and marketing" • "Flexibility & Marketing expertise" • "Brilliant identification of an NPD opportunity. while broadening their range and catering for B2B contract trade. 4. Efficient and cost-effective Innovative Great customer service Tailored solutions Sound operational delivery Source: IGD Research. and that the companies in this sector do not always have bestin-class service and cost-base in every market and every supply chain in which they operate. and who have stronger relationships with the local customer base. as well as encompassing B2C direct deliveries" • "The way they manage their international relations with retailers. 5.igd. and investment in the future through their Supply Chain Academy" Source: IGD Research.com/supplychain 125 .Managing International Supply Chains 4. 2006 4. There are often more local players who are best able to suit the local market needs. and no overall preferred provider. 2.

igd.4. 2006 126 www. the market is still highly fragmented and even the larger players do not always have full international coverage. Name of Logistics Provider Reason • "True national shared user" • "A professional approach in a broadly unprofessional sector" • "Great start-up of a new DC in France" • "A very efficient and cost-effective transport network for Central Europe" • "Offering multi-modal distribution and although relatively new to contract haulage have quickly established themselves as category leaders" Source: IGD Research.com/supplychain © IGD 2006 . Some international retailers and manufacturers will exploit those differences in service offering by using a variety of logistics firms across different markets. whilst ensuring that the additional complexity created is not to the detriment of the total benefit. This strategy aims to gain the best total supply chain performance. Best Practice Supply Chain Management Managing International Supply Chains In terms of logistics providers. so that smaller local firms are able to be more competitive.

com/supplychain 127 . Demand planning and forecasting Cost management Inventory management Customer Service Production.“More effective demand management. © IGD 2006 www. • Many companies are looking at ways to improve current practices . “Seasonal forecasting”.1 Demand Planning and Forecasting Improvements in demand forecasting and planning are by far at the top of the supply chain agendas for most of the companies surveyed.10 Top Supply Chain Projects Although the supply chain issues cited throughout this report are varied in their nature.Managing International Supply Chains 4.“pallet size and order size optimisation”. IGD’s research also indicates many opportunities for improvement in managing international supply chains.“improvement in customer service by the Sales team owning the sales forecast and up-dating it on a real-time basis”. Focus of Top Supply Chain Initiatives 1. 8. • Increasing the degree of collaboration with retail customers through collaborative planning. • A greater role for technology solutions providers .igd. • Simple internal business alignment projects . in terms of highlighting current solutions to help improve the working environment for companies trading internationally.10. Best Practice Supply Chain Management 4. 7. including the integration of new software”. 2. 6. 4. 2006 In this way. Opportunities for Supply Chain Improvements • • • • • Operational initiatives within and between organisations Strategic opportunities in trading markets Changes to the current legislative environment Infrastructural investment Closer working relationships between supply chain partners Source: IGD Research. 3. warehousing and distribution Availability Retail Ready Packaging Data issues and Technology Source: IGD Research. forecasting and replenishment (CPFR) and even vendor-managed inventory initiatives (VMI) . 5. “forecast collaboration”. IGD’s survey asked respondents for details of their current supply chain initiatives. 2006 4. “improving the S&OP process”.“improving the resource and commitment to demand planning”. This result leads IGD to believe that there are significant opportunities for supply chain efficiencies in this area.

companies are having to continuously reevaluate their cost base.3 Inventory Management Although considered part of a cost management process. twilight deliveries and ‘drop & go’ initiatives for retailers are also mentioned. fuel costs. difficult trading conditions in some markets. Whether through creating multi-functional customer teams. 128 www.igd. 4. and yet continues to challenge even the most sophisticated of international companies. This could be in terms of stock reduction initiatives and lean deployment.10. stock management in its own right has also been cited as a key area of focus for the international supply chain. Transport projects are a key focus for many companies. With constant competitive pressures. or improving the way that inventory is managed via an information system.2 Cost Management Cost initiatives are the second most-cited supply chain focus for those companies who participated in IGD’s survey. particularly in the area of export administration. so that inventory can be as low as possible. 4. others are looking at ways to consolidate the physical network by reducing the number of distribution centres or tendering existing contracts.10. Best Practice Supply Chain Management Managing International Supply Chains 4.10.5 Production. or making operational improvements to ensure a faster time-to-market. Supply chain optimisation is the aim of the stock management process. demands for lower prices. a reduction in the amount of work-in-progress (WIP) through better production processes. and include sourcing a single supplier for transport.g.4 Customer Service It is fair to say that excellent customer service is fundamental to any successful trading relationship.4. legislative framework). and ensure that their supply chain is as lean as possible. and increasing external business costs (e. general cost management. aligning global customers into global account management initiatives. outstanding customer service is paramount. An increase in factory-gate collections.10. but high customer service levels are maintained. Warehousing and Distribution Operational supply chain improvements also feature within the survey of top supply chain initiatives. While some companies mention a move to global manufacturing capability.com/supplychain © IGD 2006 . Some of the techniques listed by companies include: • • • • • Cost to serve to determine true customer profitability Activity Based Costing cost allocation for different product groups Continuous tendering for cost reductions Further supply chain integration to maximise efficiencies and cost reduction Waste reduction 4. as well as the need to improve the effectiveness of existing contracts.

com/supplychain 129 . In an aim to improve on-shelf availability. particularly for production planning and forecasting. for many other supply chain initiatives. IGD believes these topics will continue to dominate discussions in the food and grocery supply chain for the foreseeable future. data alignment can be considered as the foundation. or building block. as good basic data will help ensure that other processes work more efficiently. Guidelines and standards in this area will go some way to increasing the speed of adoption.igd. many projects will include moves to increase the use of different forms of retail ready packaging. © IGD 2006 www. as well as wider adoption by international retailers across many markets. 4. through to the implementation of new ERP systems. Investments in new IT tools can be a key part of any supply chain efficiency programme. as companies improve their supply chain visibility and retailers in particular drive forward their in-store replenishment improvement initiatives.7 Data Issues and IT Improvements Technology within the international supply chain focuses on a variety of topics. data alignment projects with retailers. and the improvement in management information. or increasing visibility of the chain for improved customer service. Best Practice Supply Chain Management 4.10. whether by improving operational effectiveness. For global manufacturers.Managing International Supply Chains 4.10.6 Availability and Retail Ready Packaging These two areas have been cited by a large number of survey respondents as key areas of focus for the international supply chain teams. from the adoption of RFID.

Best Practice Supply Chain Management Managing International Supply Chains 4. which certainly suggests a degree of supply chain alignment. further collaboration in the industry through better management of the international supply chain will be a powerful tool in delivering higher sales. and also continues to challenge many companies in the industry. 130 www. With the ultimate goal being shopper satisfaction. and in the right quantity may be an old adage. IGD's Managing International Supply Chains report has identified few differences between retailers and manufacturers in terms of their key supply chain projects. retailers and suppliers alike. but it continues to be the basis for all good supply chain practices. both large and small. Operational delivery 3. Once in the retailer's possession. 2006 Overall. it is true to say that this is not the case for all. a supplier (brand management) or a service provider (cost effective). Although 'best-in-class' can represent something slightly different for a retailer (collaborative). delivering less stock more frequently. but IGD believes that closer industry collaboration will help companies overcome many of the barriers to delivering world-class international supply chains. and shortening the time to market. there are also some distinct similarities across the end-to-end supply chain for a winning business formula. Innovation Source: IGD Research.Whilst improved availability is 'top of mind'. so is reducing stock levels. and excellent customer service. there are still many challenges in driving strategic alignment and real end-to-end capabilities. lower costs. and indeed the solutions many.igd. and the primary focus of the external trading relationship is simply to get the product to the retail customer. at the right time. for some at least. Collaboration can be limited.4. Although some companies are generally taking more of a holistic view to supply chain management. the challenges for managing international supply chains can be significant. Highlighted through the vast array of case-studies and examples in this report. both internally and externally to the organisation.com/supplychain © IGD 2006 .11 In Summary Getting the right stock to the right place. The companies that came out on top of the IGD international supply chain poll all show elements of the following key characteristics in their business models: Winning Characteristics 1. Where organisations still have a compartmentalised view of the supply chain. Strong customer focus 2. and they understand the key role that the manufacturer can play in ensuring their product reaches the shopper. the domain of the retailer. what then happens to the product remains.

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