The retailer's hi-tech network for zipping goods from supplier to customer in double-quick time kicks off our look at the industry.
The logistics experts at Sainsbury use a lot of very sophisticated hi-tech equipment to ensure that goods zip down the supply chain from supplier to supermarket customer in double-quick time, but when it comes to describing the result they fall back on very low-tech metaphors. Bar-code scanning at the checkout has changed the whole supply-chain operation from a 'push' system to a 'pull' one, says Angus Clark, the Sainsbury director responsible for systems and distribution. Historically, requirements were forecast centrally, based on previous amounts issued to the branches, and the goods were then pushed down the supply chain towards the customer. Scanning, which allows Sainsbury to capture retail sales information the minute the customer buys a commodity, has reversed the operation.
'The supply chain has turned through 180 degrees,' says Clark. 'The emphasis today is on pull rather than push. The customer activates the supply chain the minute he or she buys a particular product. Using scanning, you're able to identify what the customer is actually buying and from that you can orientate your whole supply chain to one that's catering for the real demand that the customer has.'
Clark and his colleague, director of corporate logistics Mike Powell, preside over one of the biggest retail-distribution systems in the country. Sainsbury's supply chain processes 17,000 commodities from more than 1,000 suppliers through 21 depots. Nearly 1,000 lorries are used to distribute 11 million cases of goods a week to 340 stores. The group's supermarkets provide more than 11% of the food consumed in the UK. The supply chain operates 24 hours a day, 364 days a year (it closes on Christmas day) and Clark claims that more than 90% of the products are delivered within 24 hours of a supermarket manager ordering them.
The fact that performance can be maintained day-in-day-out is largely due to information technology. Sainsbury was the first UK retailer to introduce computerised systems to support its distribution activities and the first to put bar-code scanning into all its supermarkets.
Every Sainsbury's supermarket has its own computer, linked to its checkout counters. The computer assembles and analyses information about the flow of products. Branch-based number crunching is the bedrock on which the whole logistics system rests.
The scanners not only tell checkout operators and customers how much individual goods cost, they tell the store's computer how many items have been sold. The computer tallies up the sales score for each item and matches it against stocks, so that by the end of the day the manager knows precisely what the demand for particular items has been and what is needed to replenish stocks. 'Once you know the sales you can calculate the appropriate branch orders,' says Mike Powell, 'and once you know the appropriate branch orders you can calculate back up to what has got to be ordered from the supplier.'Angus Clark describes it as a 'star' structure: 'We pull in all the information from the branches, through the network, and then it fans out back through the network to the appropriate distribution centres.'
The actual products reaching the supermarket do not come straight from the supplier but from one of Sainsbury's 21 regional depots. These hold what are in effect buffer stocks of most items. The organisation's IT network tells the appropriate depot which items the individual stores in its region need. It then tells the product manufacturer that the depot itself needs its stock replenished. The supplier, in fact, gets a bulk order broken down depot by depot. The network of 21 depots is organised by product type and, in general, an individual supplier will deliver to not more than seven or eight depots. Because the system is now so sophisticated the depots need to hold only very small stocks of any item, which, of course, cuts costs.
Although the systems that control the distribution network are Sainsbury's, a lot of the actual physical side of distribution is now contracted out to third parties - specialist companies such as Exel, Wincanton and Tibbett and Britten. Two-thirds of its distribution is currently contracted out. 'We were the first to use third-party and I'd claim we actually created that industry as far as the retail sector is concerned,' says Angus Clark.
The spur was the troubled industrial relations climate of the '60s and '70s, says Clark. The company feared supermarket chains would be particularly vulnerable to labour problems. 'It was very difficult to control industrial relations in a high-demand situation. If you're talking about short-life perishables on a day-one-for-day-two delivery then it's like producing newspapers, and I don't need to remind you what Fleet Street was like in the '60s and '70s. We had to find a solution and we found it by developing a third-party industry where their whole commitment was to distribution and they hadn't the power to hold the business to ransom.'
A second, equally important reason, was the company's investment strategy. It was clear where its scarce resources should go. 'We wanted to put our money into stores, not into distribution assets, so we were able to use other people's money by doing a contractual arrangement.'
At bottom, says Clark, it's a question of recognising what business you are in. 'We are in the retail business. We are in the supply-chain management business, but not necessarily every last operation within it.'
Although it contracts out the majority of distribution to third-party operators, Sainsbury still keeps about 35% in-house. 'We believe the best advantage is in having some in-house so that we have management knowledge and expertise and therefore aren't innocents abroad in dealing with the third-party industry.'
The in-house bit gives Sainsbury an intimate knowledge of costs and attainable levels of efficiency. It then uses these as benchmarks against which to measure the performance of outside contractors. The in-house capability also provides the group with a test-bed for new systems and methods which, once proven, can be rolled out for use by everyone in the distribution network whether in-house or third-party.
Not everyone is as positive about third-party contracting as Sainsbury. A number of recent reports have found dissatisfaction among users. Clark thinks that in the end it comes down to the professionalism of the parties concerned. 'I think the major reasons for dissatisfaction are that the contract is so poorly constructed that both parties have a different view as to what they're going to get from it, and secondly, that the person receiving the service doesn't understand sufficiently the detail of how that service will be operated. We overcome both those things, so we're not critics. We think third-party plays a very effective role but the relationship needs to be properly managed. Do all of that and you've got a satisfactory arrangement. Don't do those things and you've got frustration and inefficiency and an amateurish approach.'
The satisfied users of third-party distribution, says Clark, are those who have a shared understanding of the job. 'The rumours of discontent one hears only come from those who choose not to understand the overall logistics in which the operation is set.'
Clark and Powell both think Sainsbury's transport and distribution system is about as good as it could be at this stage of its development, but both also feel that there are significant opportunities for further progress between now and the end of the century. 'One area,' says Powell, 'is logistical advances within suppliers. Obviously, we can have extremely advanced systems but at the end of the day we've got to connect with the logistics and systems of each supplier. So unless the suppliers as a community are getting cleverer with their own methods and systems and are able to interplay with ours, it won't work.
'That's clearly going to be another quantum change. When the critical mass of suppliers can all achieve short lead times into depots, for instance, that'll be another opportunity. The first breakthrough in applying IT to logistics was downstream, getting a smooth flow of goods to the branches. We're now turning our attention much more to the upstream part,' says Powell, 'the flow from the suppliers to the distribution depots.'
Once that is under way, says Clark, Sainsbury will be able to make quite an impact in reducing the amount of stock in the supply chain. 'The taking out of stock will continue and I think we'll get to new levels of achievement in that area by the end of the century. The buffer stocks will shrink. That reduces costs. It also means you need fewer depots and you certainly get more through what you've got.'
Looking at Sainsbury's main competitors, Clark thinks Tesco is probably running a close second in logistics.'It came to it late compared with ourselves and that's an advantage. It was able to start from a more advanced situation.' Tesco was able to join the race when all the hard work had been done. There were systems and software available and it chose well. 'It is well placed, better than any of our other competitors and obviously it'll be an interesting pacing exercise between the two of us up to the end of the century and beyond.'
According to a recent survey, most organisations now contract out some of their transport to specialist third-party operators but most warehousing remains in-house.
The survey, by Andersen Consulting for the Chartered Institute of Purchasing and Supply, looked at 261 companies with a combined annual turnover of more than £52 billion and some 1.2 million employees.
Overall, 83% of companies used third-party transportation. The biggest users were consumer-product manufacturers, 92% of which contracted out. The most modest usage (57%) was by the National Health Service, utilities and government. Even bearing in mind the caveat that some of the companies have included in 'distribution' such things as short-term hire and postal and courier services, the figures look encouraging for the distribution companies.
Cost reduction is the key influencing factor.While most companies seem now to recognise the cost penalties of running totally in-house transport operations, the same cannot be said of warehousing. Only 38 % of the sample used third-party warehousing. Among the reasons for that, Andersen suggests, are fear of losing control and the greater risk to customer service. 'Companies may see contracting-out transport as more easily reversible than warehousing.'
One startling finding is that while the prime reason for using third parties is to reduce costs, nearly two-thirds of the companies investigated had not actually done so.
Done properly, says Andersen, contracting-out can achieve worthwhile improvements in cost, service and management control. So one of the first conclusions that must be drawn from the survey is that the buyers of such services need to understand fully what they are purchasing and why. 'This can be determined accurately only through an understanding of the current cost profile and a rigorous assessment of in-house versus third-party options. Evidence from third parties and from companies contracting-out reinforces the fact that the challenges of the change are often grossly underestimated. The transition process is too often under-planned and under-resourced.'.