UK: IT DRIVES THE CHAIN. - Transport and Distribution - IT could easily absorb as much as 30% of the logistics budget for any organisation that is setting up from scratch.

by Malcolm Wheatley.
Last Updated: 31 Aug 2010

Transport and Distribution - IT could easily absorb as much as 30% of the logistics budget for any organisation that is setting up from scratch.

Exciting new technologies in logistics were once to do with physical distribution: racking systems, trucks and automated warehouses. These days, the buzz surrounds the use of IT in logistics. While the development partly reflects diminishing marginal returns in the physical handling technologies, it also illustrates IT's emergence as a tool for both data handling and communication. With today's emphasis on logistics within the entire supply chain, communication of pieces of information as diverse as demand patterns, vehicle locations and inventory quantities is vital.

Expenditure on logistics-related IT applications has therefore been rising sharply, and software and hardware companies have been battling to claim their slice of the market.

According to conference organiser Andrea Murphy, over 40% of the exhibitors at Logistics '96 this October offered IT solutions of one description or another, be it hardware, software, data communications equipment or systems integration services. What's more, 'the distinction is blurring', she notes. 'IT capability is being built into everything from automated materials handling systems to forklift trucks.'

Consequently, points out Rob Morgan, director of supply chain re-engineering at management consultants KPMG, the IT-related costs borne by industry have been rising. He estimates that a new entrant, needing to develop a logistics capability from scratch, would find that 20%-30% of the costs of the overall logistics infrastructure was represented by IT-based items. 'IT is now a significant logistics enabler,' he adds. 'It's a real competitive differentiator.'

But how? Where exactly does that extra competitive edge come from? The answer depends upon your perspective. IT certainly has a growing role within business at a micro level, aided by mobile data communications.

Automated warehouses, once a fashion that looked set to give way to more flexible approaches, are now seeing a new lease of life as businesses realise that they can link them to forklift trucks and stock control systems.

Vehicle fleets can be made more responsive with in-cab data terminals that direct drivers to their next delivery or collection point, and print out error-free documentation on the spot.

However, it is at the macro level, across the supply chain as a whole, that IT is seen as offering businesses the greatest opportunities. According to Dr Ian Canadine, director-general of the Institute of Logistics, businesses are seeking what he describes as 'the control room concept'. 'Blue-chip companies are becoming very serious about large integrated logistics systems,' he notes. 'They want to know what is going on throughout their entire supply chains - to be able to predict the consequences of a ship slowing down somewhere in the Mediterranean, or of a disruption in the supply of components from Japan.'

Systems suppliers are therefore seeing strong demand from companies wanting such control, particularly those operating on a multinational and multi-location basis. The task before them is complex since it frequently calls for transactions to take place in several languages and currencies, and for inventories and production pipelines to be visible to users thousands of miles away.

German software giant SAP's R/2 and R/3 software products have for a long time been virtually the only software serving this market, despite a reputation for complex and expensive implementation procedures. For a long time, the only real alternative was writing one's own software.

Companies such as Hewlett Packard did this over 10 years ago, but now it, in common with many others, is phasing the system out in favour of an SAP solution that 'plugs some of the gaps from which the old system suffered', according to logistics manager Gilbert Celli.

The objective, he explains, is for the company to be able to take an order in one country, deliver it to another, and (if necessary) invoice in a third currency. The principal medium for achieving this is electronic communication through electronic data interchange (EDI) rather than the faxes upon which the company relied before. Orders are transmitted from dealers across Europe to a central demand collation point in Germany, and thence - instantly - to the various factories and distribution and configuration-postponement centres around Europe that will meet the demand.

Back down the line will flash a message indicating the anticipated delivery date. The message is sent days before it would have been despatched under the old system, and by the time it is sent, schedules and material call-offs have already been put in place to meet the commitment.

'The whole point of technologies such as EDI, e-mail, electronic point of sale (EPOS) and barcoding is that they don't have to mimic paper-based processes,' says Colin Billinge of GE Information Services. Retail chain Tesco, he notes, has achieved a step change in productivity through a range of initiatives based on EDI. 'Stock turns have increased from 13 to 36 times per year, while customer service levels have risen from 92% to 98%.' Overhauling its logistics function, focusing largely on the role of IT, has enabled another GE customer, Motorola, to slash procurement lead times from 40 days to one day, and cut warehousing space requirements by 50%.

But attention is already shifting from simple EDI to a wider approach that aims to link together a number of new technologies under an umbrella of cross-company co-operation. Efficient consumer response, or ECR - the search for technology-led advantage in the supply chain - is currently attracting a huge amount of attention in the grocery industry. If successful, it should prove a model for other, less efficient industries. At its heart lies a switch in corporate strategies away from the adversarial approaches that currently cripple the efficiency of most supply chains.

For if every link in the supply chain fully implemented technologies only patchily implemented so far (such as cross-docking, automated store ordering from EPOS data, barcoding, and electronic funds transfer), considerable gains could accrue. According to the ECR Europe Executive Board, a group of suppliers and manufacturers who are interested in the technique, $27 billion (£17.3 billion) a year could be cut from the cost of Europe's food retailing supply chains through the combined effect of an estimated likely 4.8% reduction in operating costs, and a 0.9% reduction in inventory costs.

Despite the enthusiastic reception that ECR is receiving - instead of the 300 delegates expected to attend a recent conference on the subject, 1,200 turned up, and 300 were reportedly turned away - the actual adoption of ECR is proceeding more slowly than some of its proponents would have wished. 'There are some barriers,' acknowledges Philip de la Chambre, head of Coopers & Lybrand's ECR consulting practice. A basic lack of understanding of ECR's objectives is one such difficulty.

Another, more serious, problem is a lack of empathy with ECR's objectives.

Co-operation is vital for ECR to work, and undue exertion of power or abuses of participants' relative positions simply 'destroy the potential gains'. Likewise, cross-functional politicking within companies can also damage the fragile bridge-building process.

But the most intractable problem is ECR's heavy reliance on systems that extend along the length of the supply chain; it means that what de la Chambre describes as 'differences in maturity' constrain the chain to the capability of the least sophisticated link. Likewise, much of the potential of EDI and barcoding is wasted unless it extends right across the supply chain: isolated islands of excellence are likely to do little on their own.

Unfortunately, an ECR feasibility study carried out on behalf of the ECR Europe Executive Board serves chiefly to highlight gaps in the supply chain. Although every company covered in the study was implementing at least some ECR principles, the average overall maturity score achieved by manufacturers was just 35% - in other words, they were little more than a third of the way towards achieving full ECR. Retailers scored little better, with an average score of 42%. What's more, for both manufacturers and retailers, 'a broad spread existed between the most advanced and least advanced companies'.

Much of the change in attitude required has to come from retailers, whose rapacious approach to cost-cutting has encouraged the present-day adversarial culture of the food industry supply chain. The next year or so will show whether they have the breadth of vision to overcome these difficulties; if they do not, then ECR is unlikely to spread from its current tentative beachhead. One sobering thought should encourage retailers, however. In the US, where ECR first emerged, retailers are not only grappling with the same issues but also fighting off a threat from nascent home-shopping vendors, who, by capitalising on the very technologies that lie behind ECR, offer doorstep delivery without incurring the trouble and expense of operating stores.

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