After decades of cutting costs from their operations, FMCG businesses – both suppliers and retailers – are, by and large, lean and highly efficient. Many European multi-nationals have centralised production in low-cost countries, are improving staff productivity and have targeted the reduction of stock throughout the supply chain.
Cost cutting would seem to be a done deal. Unfortunately it is not: costs – notably transport costs – are continuing to rise and companies have to find new and innovative ways to drive out inefficiencies. They are, as radical governments are fond of saying: ‘having to think the unthinkable’.
For some this can mean an end to centuries-old operations and traditions – as we have seen with the closure of UK manufacturing plants in favour of far east sourcing and eastern European manufacture. For others it can involve outsourcing processes once seen as totally core and inviolate, for example co packing and co manufacturing. In the FMCG sector it increasingly means collaborating with other businesses in new and imaginative ways.
Much has been said and written over the past decade about collaborative activities between retailers and suppliers with numerous and well-publicised CPFR – collaborative planning, forecasting and replenishment – initiatives. While many of these projects have been short-lived others have led to long-term improvements in customer service levels or on-shelf availability.
With the need to cut costs still further we’re starting to see a second generation of collaborative projects emerge. These may just be the forerunner of even more innovative ‘unthinkable’ developments.
A good example is in the delivery of bulky products – breakfast cereals, snack foods, toilet rolls, disposable nappies etc: products where the volume occupied is absolutely disproportionate to the value of the goods involved. These are space-hungry products making them expensive to store and handle: typically a grocery retailer will carry around 1.7 weeks of ambient stock at the RDC; for bulky products that generally falls to around 0.7 weeks.
Because these products are bulky they are also relatively expensive to transport – you can, after all, get far fewer packets of cornflakes on your truck than cans of beans. In order to cut transport costs we are now seeing grocery chains taking a ‘just-in-time’ approach with these bulky lines and working closely with suppliers to change the distribution model. For one paper products supplier within the UK, we are now picking for individual destination stores in the company’s warehouse and then cross-docking the products at the retailer’s distribution depot, so effectively cutting the retailer’s RDC stock from 0.7 weeks to zero.
Collaboration on this level demands good integration of stock management systems to enable store-specific call-off as well as visibility of the retailer’s delivery schedules so that the cross-docking operation can be carried out efficiently with minimal waiting time for trucks and drivers.
Meeting environmental targets
While there are clear benefits for the retailer in pushing the cost of store-level pick and pack further up the supply chain, suppliers could also benefit by collaborating with other bulk product manufacturers to cut over-all transport needs and meet environmental targets.
It seems likely that the next stage in this model will take the form of regional consolidation centres where bulky lines from a number of suppliers can be delivered, consolidated into shipments for specific RDCs or individual stores, and despatched. Such multi-client centres could cut distribution costs while combining loads in this way would also reduce road miles.
This sort of consolidation could be most effective for peripheral geographies – UK examples being, Cornwall, the Scottish Highlands or the Isle of Wight – where transport costs are significantly higher and disproportional to the national average. It’s an area which ECR UK looked at earlier this year and also highlighted significant potential savings.
ECR UK modelled the potential savings that retailers could achieve by consolidating loads onto a single truck to serve their various outlets in the Scottish Highlands. It may seem a simple and obvious idea to send one full truck to half a dozen different shops rather than half a dozen mainly empty lorries to the same high street, but the concept does come with its own challenges. Why? One area to consider is if major retailers are willing to collaborate with perceived competitors on shared transport. Would Boots, for example, be happy with a van labelled Asda, say, delivering to its stores and vice versa?
Using a 3PL as an independent consolidator was seen by ECR UK as one possible solution. Again, great in theory, but the solution would involve a 3PL providing a consolidation centre from its property portfolio on the off-chance that retailers would adopt the proposed collaborative solution.
Obviously no 3PL will do this without a clear commitment from the FMCG suppliers and retailers that they will definitely use such facilities before such a project could go ahead. Environmental issues may well prove to be a significant driver here: if companies need to find new ways to cut their carbon emissions then they may be prepared to collaborate to the extent that such shared operations demand.
In the UK the traditional model for Consumer product suppliers has always been that, as the country is geographically compact, a single warehouse is most cost-effective. However, as transport costs rise and the green agenda gains momentum, having two locations starts to make more sense. Sharing that facility with another comparable FMCG operation can be even more attractive reducing both capital and operational costs for both players.
Again, carrying these arguments to a logical conclusion – and especially against the background of that environmental agenda – then why not locate the main storage facility at the point of entry, at the port? When manufacturing was largely on-shore, it made sense to site warehouses conveniently close to production centres. Now with the vast bulk of manufacturing carried out off-shore there are strong arguments for handling the deconsolidation and onward shipment at the point of entry.
That brings in another sort of collaboration: between rail network operators. We are seeing a growing number of companies shipping goods via the rail link: rail is a very green option, after all, and we cannot continue to move the 100,000s of containers arriving at our ports each week by road. It makes much more sense to transport containers of product, which have already travelled by rail from South-west France, for example, and by sea to Felixstowe, by rail to a midlands distribution centre than it would be to transfer them using trucks and motorways. If the distribution industry is to extend its use of the rail networks – as it must do – then we need greater co-operation between operators on routes and scheduling options.
We need greater collaboration to reduce empty running, too. Levels of inbound shipments from Europe continue to rise and clearly a high proportion of outbound traffic is going to be running empty. At DHL Exel Supply Chain we have developed an internal system that we call EFX – Exel Freight Exchange. It is basically an interactive ‘real time’ electronic bulletin board where details of every road haulage movement taking place anywhere in the organisation are posted. This allows us to collaborate internally to match loads and destinations. A truck delivering to a destination in Scotland, for example, can return with a consignment of product heading for a grocery RDC.
This sort of initiative will need to be expanded and extended on a European scale – with greater collaboration between 3PLs – in future, not just to cut costs and pollution but to meet the sort of challenging environmental targets we will all face.
Just as cutting both transport costs and pollution can be helped by a collaborative approach, then closer partnerships between FMCG operations and their logistics service providers can add value. Rather than commoditise the supply chain we need to look at ways of adding value across the entire operation – from procurement and contract manufacturing to final delivery to stores and customers – so that the entire value chain benefits from joined up thinking.
Also, as in other sectors, FMCG is continuing to consolidate: the big continue to get bigger and mergers and acquisitions continue to bring their challenges. That is especially true for the supply chain: the need to manage disparate distribution operations cost effectively may not be front of mind for those driving M&As but it is an area where rapid and effective integration can quickly deliver vital savings.
Whether it is between suppliers, involving suppliers and retailers, or jointly with 3PLs, the FMCG sector needs to put collaboration centre stage – not just to cut costs and carbon emissions but to benefit from very real competitive advantage.
Hugh Basham is divisional managing director – consumer at DHL Exel Supply Chain
- Multi-client centres could cut distribution costs, while combining loads in this way could also reduce road miles. This sort of consolidation could be most effective for peripheral geographies
- Greater collaboration is needed to reduce empty running. Levels of inbound shipments from Europe continue to rise and clearly a high proportion of outbound traffic is running empty
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