UK: Squeezing the supply chain - FOOD RETAILERS TAKE THE BLAME.

UK: Squeezing the supply chain - FOOD RETAILERS TAKE THE BLAME. - "A lot of talk, but not much action" - is how industry's progress on supply chain management is described, reports Tom Lester.

by
Last Updated: 31 Aug 2010

"A lot of talk, but not much action" - is how industry's progress on supply chain management is described, reports Tom Lester.

The vision is both simple and compelling. As the customer moves through the supermarket check-out, the laser scanner picks up the exact details of her purchases. The aggregated totals of these transactions are used to trigger product deliveries from the grocery chain's distribution depots. Further aggregations are signalled back to the suppliers preparing their next deliveries to the depot. The latter's production programmes are simultaneously updated to take account of the offtake. And their purchasing schedules are adjusted accordingly, so that the raw material suppliers alter their own delivery plans. All this happens before the customer has signed her funds transfer slip and left the store.

It's not a particularly futuristic vision. The necessary cheap computing power and communications technology have been available for some years. But the benefits are real. Good information is traded for hard assets, in the sense that the need for stocks is dramatically cut, reducing overall costs and waste, eliminating paperwork, improving service standards and response to fluctuations in demand - and so on. Yet if the ideal is both desirable and readily obtainable, why has progress towards it been so slow? A report on the logistics of the supply chain (leaving out the manufacturing end), carried out by consultants AT Kearney, found that in 1987 only a quarter of some 500 European firms had "the foundation to use logistics effectively as a competitive weapon." Even fewer were looking to long-term links with suppliers and customers, and to the integrated planning which that made possible, in order to give themselves a strategic advantage. Since then, some progress has been made, but led by the electronics and engineering industries. In the UK automotive industry alone there are more than 400 companies using electronic data interchange (EDI), an almost mandatory component of supply chain management (SCM). However in the consumer goods businesses there is, according to one expert, "a lot of talk, but not much action."

EDI links are admittedly increasing - Coca-Cola Schweppes has about 30 in operation - but few businesses extract anything like the full benefits of data interchange, and just-in-time systems don't go far enough. As for SCM, many companies have recognised the need but "they've failed to apply it to the whole supply chain, both within the company and externally with suppliers of raw materials and customers of finished goods." That was the view expressed by Stephen Colman, operations director of Kraft General Foods, speaking at last October's annual convention of the Institute of Grocery Distribution.

One of the most remarkable features of this event was the elementary treatment given to SCM, even though it was the theme of the convention. The grocers, it appears, lag well behind other fast-moving consumer goods industries. This is borne out by another survey conducted last summer, among 135 UK retailers and suppliers in a range of industries, which was quoted at the convention. The researchers, P-E consultants, found that half the logistics relationships covered by the survey were considered to be partnerships, and that the proportion is expected to increase significantly during the next five years. But in the grocery trades, fewer than a third of the retailers and suppliers considered their relationships to be partnerships. Among retailers alone, only a quarter said they were in partnership, and most of these admitted to dominating their logistics relationships with their suppliers.

P-E's logistics specialist Matthew Walker concluded that not only were the grocers behind the times, they were distinctly sceptical about SCM and had "no burning desire to develop it further." Another of the speakers, Ian Steele, logistics controller of Asda Stores, was eager to spread the blame: he "could stand here all day and quote you examples of manufacturers, suppliers and retailers whose intransigence, greed and inefficiency (during the 1980s) disrupted the total profitability of the supply chain ... They maximised their own profitability purely by exporting inefficiencies up and down the supply chain."

Some of the big grocery chains pride themselves on the quality and efficiency of their managements, yet Steele's partial admission would be endorsed (certainly in private) by many suppliers. They complain of short-term self-centred policies which prevent the supply chain ideal from being even contemplated. One of them told P-E: "Retailers always want flexibility from their suppliers, but most are not prepared even to consider reciprocation." Some retailers even charge the suppliers for the use of their data. If and when the introduction of SCM does cut inventories, two thirds of suppliers told P-E, the retailers will be the ones to reap the benefits and they - the suppliers - will continue to suffer. A quarter of retailers even agreed that suppliers' stocks would probably increase.

It would be unfair, however, to lay all the blame for slow progress towards realisation of that supply chain dream on the grocers. For one thing, there are significant exceptions. Tesco is one chain that has gone further than most in its links with suppliers. Asda is not far behind, to judge from Steele's affirmation that "only through partnership can the exporting of inefficiencies be stopped and supply chain profit maximised."

Today it may no longer be to the big grocers' advantage to subject their suppliers to cavalier demands. The relative prosperity of the 1980s encouraged the multiples to raise the quality and range of their merchandise (and prices to match), while giving them little immediate reason to worry about the health of suppliers or the efficiency of the supply chain as a whole. Power corrupts retailers, like everyone else, and the fact that five chains (Sainsbury, Tesco, Gateway, Asda and Safeway) account for some 60% of all UK grocery sales meant that they had plenty of power to be corrupted by.

Latterly, however, their trading outlook has darkened. The recession has hit the multiples hard, and price wars have broken out afresh. The scope for growth through development of more superstores is limited, and Continental and US competitors - used to much leaner margins - are being tempted into the UK market. For these or other reasons, progress over the next two or three years is expected to be rapid as the potential benefits of SCM sink in, and as the old confrontational style is replaced by a reasonable working relationship - if not better.

Kraft claims to have achieved "a congruence in mutual goals" with some of its customers, but admits that the relationship with others is rather less constructive.

The potential benefits of effective SCM can hardly be overstated. Horst Helleman, Procter and Gamble's European director of materials management, claims that "we have seen certain US customers increase inventory turns by 400% on our line of products. We have seen them reduce the number of people involved in our interaction by 50%; and we have moved from an average of 30% error-free invoices and deliveries to a 90% level." And that's without developing the "strategic alignment" in order to optimise throughput, merchandising, pricing, assets employed, etc.

If the retailers need to supply the basic checkout data, it is up to the suppliers to use it effectively. In the past, the impossibility of obtaining accurate demand data soon enough to influence ordering and production schedules resulted in the creation of buffer stocks at every link in the chain. Now, information can indeed be traded for assets. However the data volumes are potentially huge, and simply turning on the tap would only create an unmanageable mess. "Some suppliers get offtake estimates two or three weeks ahead - then don't make use of them," points out Gordon Hill, vice president of AT Kearney and the firm's logistics specialist. "A number of them don't recognise the difference in service standards expected, or monitor their performance." In others the resulting information does not penetrate further than one department or function, so denying the company the full pay-off. Introducing a sophisticated computer system in one area may do no more than push the problem further along the chain.

In the past many companies sought, for good practical reasons, only to optimise the departments. The purchasing manager, using his own forecasts and experience, tended to buy in quantities yielding the best price. The factory manager aimed to control costs through long production runs, to keep changeover time to the minimum. The distribution manager tried to ensure full loads and the shortest possible routes. As long as product ranges and the number of variants were small, and the service standards demanded by customers were relaxed, the co-ordination problems remained manageable, and safety margins of stock were affordable. But the number of lines is proliferating. Retailers are more exacting in their demands for service, and transport and inventory costs are rising faster than others. At the same time, however, cheap data processing power and new software systems offer increased scope for alleviating problems - even if the retail data are not forthcoming. The proviso is that managers must be prepared for some fundamental changes in traditional working patterns. These have to start with cultural and organisational changes along the chain. To break down the barriers, Hill recommends the appointment of a logistics director with responsibility for the control of the whole chain. A manufacturing director would then have to react to logistic's schedules, rather than draw up his own.

Coca-Cola Schweppes - whose bottlers are of course often independent - is one of the many businesses to boast a logistics director these days. SmithKline Beecham, which reckons to be ahead of the SCM game in certain respects, combines production, distribution and purchasing under one vice presidential hat, with sales, marketing and planning under another. Van den Berghs and Jurgens, the big Unilever margarine subsidiary, still keeps roles divided between commercial, technical and sales and marketing directors, but claims nonetheless to achieve a high level of co-operation between them.

The organisational issue is made all the more pressing by a growing need to co-ordinate production and distribution across national boundaries. Production is frequently divided between several factories, which are sometimes located in different countries, but the single market is spurring companies like SKB and Unilever to rationalise ever more fully across the European continent. For many, this is a long, slow and highly sensitive process, but the opportunity to reduce stock levels (and unit costs) while improving response times is vital if competitiveness is to be maintained. To this end a company has to be able to compare all its costs across borders in detail, and then act upon the conclusions.

Even when all the information is available, reaching the right conclusions can be a difficult and slow process. "There's a tendency to introduce modern, up-to-date software without re-evaluating operations," finds Dale Wood, Van den Berghs' development manager for computer-integrated manufacturing. A production scheduler who has long been used to working on the traditional large planning board, he points out, may not trust an electronic system that tells him to change over production in the middle of the week rather than the weekend. But that is what the lowest-cost solution, judged right along the supply chain, may actually require.

To reach that conclusion, the system has to take account of comparative manufacturing costs at all the different plants, transport costs into and out of the plants and distribution depots, demand by location, customer service objectives, capacity constraints, etc. Network analysis will then have to be used to calculate the lowest-cost solution from the thousands of possible combinations. For this purpose Wood is currently introducing Linx software, a new modelling an planning decision support system developed by Numetrix, (a Canadian firm with an office in Sutton, near London). Used on a standard workstation, Wood claims, the Linx system will optimise plans, taking a few seconds to complete work that would need half-an-hour on a PC.

There are other products attacking the same problems, and as suppliers move slowly towards the supply chain ideal there will no doubt be many more. "The perceived benefits of SCM are enormous," as Sue Oglethorpe, SmithKline Beecham's systems and information manager observes (she doubles as project leader on consumer brands). "But it needs a very long-term view and a major investment." Even so, "the biggest problem" is to "get people to react together at all the stages of the chain.

It may be that an act of faith is required. While the retail groups feel that that they have nothing to gain - and quite possibly some power to lose - by sharing information, progress is bound to be unnecessarily slow. Suppliers have to demonstrate that, given the opportunity and the powerful new tools that IT offers, they are willing to take the long-term view in order to extract the full benefits. But they, in turn, must be prepared to share these with their retail customers - and ultimately with the consumer.

Tom Lester is a specialist writer on business affairs.

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today