Lean and nimble
Retail logistics requires constant adaptation to new market dynamics.
Retail executives are looking to supply chain departments to help their companies take advantage of rising consumer demand and grow, after heavily leaning on them to stabilize finances during the peak of the economic downturn, according to an industry study and experts.
Many of the tactics supply chain managers used to slash inventories and cut distribution costs to maintain profitability for their firms when sales plummeted are being maintained to operate more efficiently as the economy improves. But the strategic focus has clearly shifted to improving customer service. Logistics professionals say that in addition to being lean, their organizations must now strive to be agile and responsive to changing demand patterns as customers increasingly migrate to the Internet and mobile devices to do their shopping.
Trends that reflect this new dynamic in the retail logistics sector include more attention to product-flow management at the store level, increased use of private label brands, multichannel inventory management and changes in sourcing strategies.
Fifty-five percent of 175 industry managers interviewed or surveyed for a recent study sponsored by the Retail Industry Leaders Association said supply chain officers in their companies report to the chief executive officer, and another 34 percent said the supply chain chief reports to the chief operating officer.
The recognition by top management that supply chain functions can provide a competitive advantage has allowed supply chain management executives to extend their influence to a wide array of activities within the organization, from purchasing to inventory management at the store level, the study said.
'Executives have refined their strategies. Their distribution role is more than just getting it to the store dock door. They're trying to take greater control by working downstream and upstream,' said study author Brian Gibson, a professor of supply chain management at Auburn University, in a teleconference with reporters.
'They're adding people on teams within the organization, using supply chain metrics to measure in-store activity so they can increase the visibility of merchant's to what's on the shelf, what's in the back room what's in the distribution center,' he said.
Integrating shelf-space replenishment with supply chain planning is one practice that separates top retailers from the pack, the report said. The effort involves aligning shelf capacity and store reorder points with shipping quantities and frequencies. Corporate supply chain professionals are also applying lean operating methodology to loading dock operations and back room management.
Shelf-driven supply chain management is essentially intended to make the process of moving goods the last 10 yards more efficient by keeping less product in the back room and getting it directly to the shelf in an accurate and rapid manner. As part of that effort, best-in-class retailers are working with manufacturers to create pure case and break-pack configurations that align with demand, store operations and shelf space.
'It may involve refining distribution process and taking on more cost in the DC, making things display ready at the DC so less time is wasted at the store, and better coordination of DC pick processes with store layouts to reduce store sorting,' Gibson said.
Consumer goods typically come out of the manufacturing facility in a single product configuration. But distribution centers can co-mingle similar products in a single case for store delivery. Shoe retailers, for example, will often receive cases with different sizes of the same shoe instead of a full case of size 9s. The break pack enables the retailer to stock merchandise more effectively in the store, but the extra work increases warehouse expenses.
Fulfillment coordination has taken on increased importance as the variety of items available on store shelves multiplies. During the recession, many retailers rationalized the number of stock-keeping units (SKUs) to reduce inventory and reserve shelf space for fast-selling products, especially because sales data was a less reliable predictor of future demand.
Today, logistics specialists have to contend with SKU proliferation again as retailers look to capture a larger share of the consumer's wallet by having a diversity of brands as well as characteristics, such as package size, said Patrick Kelleher, senior vice president of business development for Exel, in an interview.
Exel, based in Westerville, Ohio, is the North American contract logistics division of DHL Supply Chain, a Deutsche Post company. More than a quarter of Exel's $4 billion in revenue comes from retail customers.
SKU consolidation may still be operative at the store level, but less so when the entire retail organization is considered.
Retailers want to package products in different sizes and quantities to meet the needs of their various sales channels. Wal-Mart, for example, has huge Supercenters, Sam's Club (think multi-item blister pack), small neighborhood stores and online outlets, each serving a different market and ordering individual units, cases or pallets for five or six SKU variations of the same product.
| Actions that consumer goods manufacturers should consider to meet the needs of retail customers:
' Outsource primary packaging to increase asset utilization, reduce new capital investment, tailor packaging to regional demand, facilitate new product launches and save on transportation. ' Consolidate secondary packaging facilities to reduce order lead times, avoid carrying unnecessary inventory, enable timely delivery of floor-ready displays, and reduce product obsolescence. ' Regionalize distribution centers to provide more inventory responsiveness to stores and keep from building up huge stockpiles. ' Collaborate with other manufacturers to drive supply chain efficiency, share transportation and warehousing costs, and reduce carbon emissions. |
'Retailers are reconfiguring product to meet the mission of each of those retail channels and the consumer expectations of those channels,' Kelleher said.
Postponement is a tactic popularized in recent years to deal with this added complexity and reduce transportation costs in which products are not configured for final sale until the point of distribution, when there's absolute certainty about demand.
Store Brands. All of that is complicated by the emergence of private-label brands. The interest in private labels goes beyond designing products and outsourcing production to a third party. Many retailers are also manufacturing their own products to better control their logistics and costs. And the responsibilities are being put under the control of the senior vice presidents of logistics or supply chain.
One executive quoted in the report said his company quadrupled self-manufacturing volume in a year and plans to continue growing that activity.
Internal manufacturing eliminates supplier markups and may utilize the retailer's existing logistics network, minimizing inbound freight costs. Producing store brands also provides greater control over product flow and availability, reducing the chance of stock outs, RILA's report said. Another advantage is that store brand designs may be changed more easily and inexpensively, often to meet local tastes.
Private-label manufacturing is prevalent in the grocery business ' Kroger alone owns 40 plants that produce 39 percent of its store brand bakery items ' but is also spreading to some apparel retailers.
'What we see is the non-private label brands are still on the store shelf, but they are in lower quantities than in the past. The brand names still may be on the shelf, but now less shelf space is devoted to them, and they are being replenished more frequently and in smaller quantities,' Kelleher said.
Many manufacturers of fast-moving consumer goods are responding to smaller, more frequent orders from retailers by outsourcing primary packaging to distribution centers located closer to the ultimate consumer. This gives them more flexibility to meet customer needs and reduces transportation costs.
These manufacturers should also consider consolidating secondary packaging ' customized packaging, special product sizes and promotional bundles ' in an existing distribution facility, rather than a separate packaging house that has to ship the product back to the plant or warehouse, Exel-DHL Supply Chain said in a white paper on consumer goods supply chains published in November.
'This helps reduce order lead times, avoid carrying unnecessary inventory, enables just-in-time shipment of floor-ready displays and products for advertised promotions, and can result in less SKU and material obsolescence,' the white paper said.
Third-party logistics providers that operate cross-dock facilities shared by several customers can also build store-ready pallets by product category containing items from multiple manufacturers. This practice reduces receiving costs by allowing shipments to bypass the retail DC and be delivered in truckload quantities directly to the store, and streamlines replenishment at the store level.
The supply chain group is also more engaged in vendor negotiations, including for inbound transportation, Gibson added. Last year Wal-Mart, for example, made public its desire to change the terms of sale in supplier contracts to get control of the freight for efficiency purposes and use their volume buying power to negotiate more stable rates with pre-selected motor carriers.
Gibson said one company that participated in the RILA study is even considering forming its own non-vessel-operating common carrier to manage its ocean freight and then offer the service to other retailers that need container space. Putting transportation managers on the ground in China is seen as a way to protect the company from rate spikes after exceeding its annual contractual commitment for container bookings, and guarantee capacity when needed.
'They are concerned that with so much capacity taken out of the system that it will really slow things down for them and limit their ability to operate effectively' once the economic recovery hits full stride, he said.
In addition to taking on more responsibility for inbound logistics, a handful of retailers are also taking responsibility for their own warranty support, said Lorcan Sheehan, senior vice president of marketing for ModusLink Global Solutions, a supply chain management, reverse logistics and e-commerce outsourcing firm in Waltham, Mass.
Instead of simply buying merchandise and having the original equipment manufacturer provide warranty support, some retailers are negotiating to manage the warranties because they have their own return and repair operations. In exchange for taking on this task, they expect to get a discount on the wholesale price.
One way companies want to become more agile is by integrating their inventory for various store, online (and now mobile device) sales channels under one roof, according to logistics industry experts. In the past, most companies fulfilled store and online orders from separate distribution centers. Trying to align those different processes, workforces and technology platforms has been a challenge so far. But leveraging inventory across multiple channels is considered a new opportunity to improve customer service and eliminate redundant inventory and infrastructure.
'We need to quit treating e-commerce as a hobby. We need to get serious about it and we need to figure out how to do it most efficiently,' Gibson recalled one supply chain executive saying.
'Those multichannel retailers that have online and mobile capabilities, as well as bricks-and-mortar stores, are really trying to make sure they're integrated across all channels to help differentiate themselves from online pure plays, whether you're talking about the ability to return items into the store and take advantage of a return logistics path, or opportunities to touch and feel a product in front of you,' Casey Chroust, executive vice president of retail operations at RILA, said during the teleconference.
Similarly, few retailers have coordinated their reverse logistics operations. A study done by FreshMinds Research on behalf of DHL Supply Chain recommends that retailers with physical stores reduce the cost of the returns process by creating incentives for people to return to the store goods purchased.
Demand Planning. Retail and logistics industry officials say there is a renewed emphasis now on collaboration with product manufacturers, and third-party logistics providers, in the form of sharing consumption data, inventory positions and other information to improve knowledge about when and how to fill orders.
'There is a lot more work on getting aligned on forecasts rather than going with a single-point forecast' to enable low inventory levels, said Sheehan of ModusLink.
Exel is offering a relatively new service, which allows it to take an electronic point-of-sale data feed, as well as information about upcoming and previous promotions, and run it through a JDA Software tool to forecast demand on an individual product level, Kelleher said.
'Having immediate availability to that information allows us to react much more quickly to make sure the store shelf is stocked properly and we can affect strategies around postponement to leverage common product families and configure products to meet the needs of the specific retail channel, while at the same time minimizing inventory levels,' he said.
The contract logistics firm is calculating demand for about a dozen customers. Most of its other clients provide Exel with forecast demand planning outputs that they generate themselves.
Leveraging forecast, demand and replenishment-frequency data, for example, can help a 3PL optimize the size of the package that comes off the manufacturing line from a 24-count to a 12-count case if the pattern shows the distribution center breaking apart larger cases to fulfill smaller orders to the store.
Getting data in near real time enables Exel to be more agile.
'We see more value when we're actually performing the forecasting and demand planning because we can marry that data up with the visibility into the supply chain activity and quickly find, and implement, efficiencies,' Kelleher said.
Offshore Sourcing. Meanwhile, retailers continue to explore new sourcing opportunities, and many are slowly shifting some of their contract manufacturing plants from China to other countries, industry experts say.
Retailers began to realize in 2008, when oil prices soared, that China may not always be the lowest-cost production option.
China's cost advantage as a manufacturing center has begun to erode as:
' Labor rates rise to compensate for lower supply of cheap manpower.
' More factories move inland to lower production costs thereby creating additional cost to transport goods to ports.
' International transportation costs and value-added taxes for exports increase.
' China's currency appreciates.
' Emerging economies such as Mexico, Eastern Europe, South America, Southeast Asia and Africa have improved their infrastructure and become cost-effective alternatives requiring shorter supply chains.
'Retailers are not moving full force away from China, but they are definitely taking a diversified approach to sourcing,' Chroust said.
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The move towards more near-shore production is accelerating, especially for high-value, large items such as TVs, appliances, furniture and even apparel, which is subject to strict quota levels from each country, Kelleher said.
Intermodal. Some large retailers are also interested in expanding their use of intermodal transportation for inbound transportation to their distribution centers.
JCPenney, for example, is looking to expand intermodal volumes on lanes it uses and find opportunities for new intermodal lanes, said Rich Wallace, vice president and director of supply chain operations, during a panel discussion at the Transcomp Exhibition and Intermodal Expo in Fort Lauderdale, Fla., on Nov. 16.
Merchandise retailers require consistent, predictable service if they are going to use the truck-rail option because they can't afford to have store stock outs, logistics executives say.
JCPenney is extremely satisfied with the new intermodal service it uses from the Port of Prince Rupert in Canada to Chicago, Wallace said. Merchandise, mostly furniture, arrives by vessel from the Far East at the dedicated intermodal port and is loaded on Canadian National trains. The Plano, Texas-based retailer has experienced a four-day improvement in transit time versus transloading products to larger domestic containers on the West Coast for a transcontinental rail move.
International intermodal services from Oakland and Los Angeles to Florida present a modal-shift opportunity if rail carriers can improve what is now an inconsistent service, Wallace said off stage.
Home repair retailer Lowe's has also steadily grown its intermodal transportation purchasing and is actively looking for more lanes that can provide consistent transit times, said Michael Mabry, executive vice president of logistics and distribution.
Exel's Kelleher concurred that retailers' use of intermodal transport has definitely increased during the past couple years.
Wallace also expressed interest in seeing 53-foot ocean containers become the norm because of the greater flexibility it will give shippers moving products inland. APL has introduced some 53-footers into its Asia/West Coast service as a way to reduce time and costs to large shippers that transload much of the inland-bound cargo from 40-foot containers into large domestic equipment, although JCPenney has yet to try the larger international equipment.