UK: THE OBSTACLE RACE TO MARKET. - Transport and Distribution - Managers across the supply chain must be cajoled to trade autonomy for efficiency.

by Malcolm Wheatley.
Last Updated: 31 Aug 2010

Transport and Distribution - Managers across the supply chain must be cajoled to trade autonomy for efficiency.

Perhaps appropriately, things are moving fast in the world of logistics, to the point even where logistics practitioners are in danger of biting off more than they can chew. For while no one doubts their talents when it comes to co-ordinating physical distribution, some of the latest trends in logistics call for skills more common in the diplomat than the warehouse manager. The task facing today's logistics professional is far less a question of browbeating delivery drivers, far more a matter of cajoling competitors and suppliers into joining co-operative initiatives.

It's quite a change. For most of the last decade, logistics professionals have wrestled with a definition of their own identity and role. And, given licence to create the logistics function out of pieces carved from other departments, the empire builders have created an impressive edifice, stretching far beyond transport and distribution.

In a world where branding, marketing campaigns and product innovation offer increasingly slim competitive advantages, a slick logistics function certainly offers companies another means of competing; getting logistics right enables firms to take costs and working capital out of the supply chain while simultaneously upgrading their capability for generating customer satisfaction. Britain can rightfully pride itself on having taken a lead, for UK industry, especially in the automotive and retail chain sectors, has been particularly good at exploiting the potential of logistics. In contrast to the pipeline inventories of US retailers, which can exceed 100 days of supply, the best British retailers, notably Tesco and J Sainsbury, can boast pipeline inventories a third of this size.

As a result, the logistics function in Britain is no longer the poor relation it once was, although whether it is yet accorded the full importance that it deserves is debatable. Taking inbound and outbound logistics costs together, it is not difficult for these to total one third of a typical company's manufacturing costs; and whereas manufacturing costs are usually strictly monitored and managed, logistics costs enjoy a less rigorous scrutiny. One widely quoted example - of Unilever Foods Europe - illustrates the point nicely: until recently, the division used to spend £1 billion a year (or 9% of its turnover) on inbound and outbound logistics, yet allocated almost no one to monitoring or improving the process.

The concept of optimising the supply chain - with its concomitant refrain of optimising the big picture rather than just individual links - is the inspiration that has fuelled logistics professionals' ambitions. Step outside the boundaries of the individual organisation, runs the argument, and look at maximising the efficiency of the supply chain as a whole, something that might not happen if each business in the chain simply strove to run its own affairs at optimum efficiency. For, when each organisation regards itself as a stand-alone unit, demand uncertainty is buffered by inventory holdings in between each part of the chain, and decisions made in one part of the chain may impact adversely on costs - and efficiency - elsewhere.

Converts to this new way of operating first turned their thoughts to global sourcing - supply chain integration at a worldwide level - but most have since scaled back their ambitions as reality has struck. Supply chain integration at a pan-European level is already proving sufficiently taxing for most; though the theory is fine, it falls down in failing to recognise the desire of managers in different parts of the supply chain to run their own businesses and manage their own bottom line. Yet the logic behind the theory is impeccable: post-1992, it no longer makes sense for multinationals to view Europe as a collection of individual countries, each with their own manufacturing, selling, warehousing and distribution functions. So why not rationalise things, and reorganise the manufacturing and distribution business on a pan-European basis? According to one survey, today just 26% of multinational companies co-ordinate their supply chains at the national level, down from over half a few years ago. European strategies of at least some description are favoured by 37% of such businesses.

Meanwhile Alan Waller of consultants Coopers & Lybrand points to the example of one multinational which has been able to begin contracting its European manufacturing and logistics network from seven factories and 13 warehouses to just two factories and two warehouses.

For all that, the objective is proving an elusive one to achieve in practice. Waller, a longtime proponent of a pan-European approach, concedes that barriers remain to be overcome - and not those that might once have been imagined.

Broadly speaking, the legislative framework is in place, while a future single currency will make the administration aspect even simpler. Multi-language, multi-currency software systems to handle the transaction processing and inventory management functions are now available from companies such as SAP, Oracle and Manugistics.

Instead, the biggest hurdle may be attitudinal. 'Trust is a real issue,' says Waller. 'People see inventory as an asset, and as a comfort factor.' As a result, sales forces can face an uphill struggle convincing customers that they can be as responsive from Rotterdam as they can be from Runcorn.

Nor are managements immune: losing control of a national inventory is often seen as a loss of sovereignty that represents a logistics innovation too far - for the time being, anyway. At the altar of such gut reactions, a number of grandiose pan-European supply chain projects have fizzled out into one of the variously-encountered forms of halfway house.

One compromise option that has proved popular is to rationalise manufacturing to gain economies of scale, but to leave the logistics operation virtually untouched, with country-based management fiefdoms still in place. Customers continue to be served by the same nationally based warehouse that has always served them, with no attempt at cross-border deliveries. The problem is that while local managements enjoy a sense of comfort from having stock on hand, this might not be the right stock, and, with the closure of national factories, the new pan-European manufacturing organisation may not be as responsive to customers as its smaller and nimbler predecessors were.

Hence the development of postponement centres, another currently fashionable logistics technique. Here the idea is that instead of making the exact variant the customer requires first off, a generic product will be made that can be customised as close to the customer as possible. Europe's multiplicity of languages makes it an ideal deployment ground for the technique, and unsurprisingly it is companies in the electronics and computer businesses, such as Hewlett Packard, who have been among the most enthusiastic adopters of the approach. Instruction manuals, hardware facia, keyboards, software, each comes with a national or language variant which is often the only distinguishing feature in otherwise identical products. By postponing the choice of language and national destination until a firm order is placed, companies can not only cut delivery times, but eliminate buffer stock though pooling demands. Even so, the technique remains a compromise solution, notes Artur Landwehr, logistics manager of Hewlett Packard's European computer systems business unit. 'Build-to-order remains the ultimate objective,' he stresses.

Another compromise option adopted by many companies is the European distribution centre model which leaves management fiefdoms and manufacturing structures untouched but still aims to attain economies of scale in distribution and handling. Once more, the concept is a simple one: why have one warehouse in each country when a single pan-European operation will suffice? By outsourcing the function to a partnership between distribution company Hays and parcel carrier UPS, computer company Compaq, for example, was able to replace its 13 nationally-structured spare parts warehouses with a pan-European facility in Holland, supported by two satellite operations.

Customer service levels are claimed to have improved from a historic level of around 70% satisfaction to one of around 95%, while inventory levels have been slashed by 40%. Over the same period, Compaq saw its combined warehousing and transport costs fall to 'some 15% lower per part shipped than under the old network,' according to Jeremy Shepherd, Hays' contract director.

Compaq may have been fortunate in its outsourcing experience, however, according to Martin Christopher, professor of marketing and logistics at Cranfield University School of Management. Although outsourcing is popular, 'there are downsides to the concept,' he notes. 'It's quite possible to see local transportation costs actually increase.' Although Christopher is too polite to say so, one reason for this is that logistics capabilities vary widely across Europe, and UK companies have been known to find that the sophistication offered by other European logistics service providers compares unfavourably with what is on offer at home. Certainly Hays' Shepherd believes his company is benefiting from mainland European service providers' more restricted flexibility when it comes to pan-European operations. 'They tend to say: "This is what we offer," rather than "What are you looking for?",' he notes.

Nor is cost the only problem: pipeline times can rise as well, although inventory reductions through demand pooling can help to disguise this.

'It's important not to take too narrow a viewpoint,' stresses Christopher, pointing to the growing capability of IT-based logistics solutions as offering alternative ways forward. 'Physical centralisation of inventory isn't the only option,' he says. 'It's now quite possible to manage physically separate inventories as though they were in one place.'

This is one aspect of efficient consumer response (ECR), another logistics approach that is currently attracting attention (see following article).

As with the pan-European supply chain, it aims to optimise logistics across a number of companies, this time in those links in the supply chain upstream of large grocery multiples. Retailers thus share the electronically gathered point-of-sale data that they capture at the checkout with their suppliers, who in turn share it with their suppliers, helping to pool and shrink their joint buffer stocks. Other co-operation, in the form of category management, product innovation and cross-docking is also encouraged: fuzzy forecasts are out, precise demand data and co-operative action is in.

The problem is that while plenty of retailers across Europe have been enthusiastically endorsing the approach, suppliers have been wondering what is in it for them - other than a loss of market share if they fail to go along with the idea. As usual, it seems, logistics professionals will have to be inordinately persuasive if they are to cajole partner businesses to see the wider picture.

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