Unless you sit down and add up all the little increases you probably do not realise the enormity of it all: but from January 2007 to January 2008 fuel prices in the UK rose by 21 per cent. That is a massive increase in operating costs for any business involved in or using distribution services. It is a massive hit on profit margins and – given global economics – not something which is going to be resolved by corresponding price cuts in the foreseeable future.
We live in a rapidly changing world where the West no longer dominates the industrial landscape and where developing economies – notably China and India – are now competing for diminishing resources. The whole pattern of supply and demand is changing with limited supply and ever increasing demand from global consumers who wish to emulate the affluent lifestyles of the West.
Distribution companies can no longer depend on traditional cyclical trends in economies to deliver good times again: they have to accept that what goes up doesn’t always come down and adapt to this new world – and adapt quickly.
Lower cost suppliers
Most companies in the West are involved in importing goods. Their manufacturing base continues to diminish as they turn to lower cost, and sometimes more efficient, suppliers in the Far East, South America or Africa. Importing is no longer an occasional exercise – it is a normal, everyday practice covering the bulk of the consumer goods sold in our shops. Large retailers may have established buying offices in Shanghai or Hong Kong, they may be negotiating with factories in the remoter areas of rural China, but their approach to transporting all these goods back to the UK has not changed dramatically in decades.
The majority simply leave it to their shipping line – and that line”s selected haulier – to bring the goods, not just to Southampton or Felixstowe, Rotterdam, Hamburg or wherever, but to their national distribution centre, be that in Coventry, Lille or Turin.
In doing so, the nominated haulier drives its container loads past many dozens of the retailer”s own stores. Once at the National Distribution Centre (NDC), the goods must be unpacked, sorted and sent back along the same motorways to those same stores passed maybe 24 hours previously. By looking at ways to integrate their secondary distribution channels with activities at the port, companies can not only cut their transport miles and fuel costs, but they can reduce empty running and carbon footprint. It”s a win-win for both the environment and the business.
There are two obvious tactics to consider. The first is to look at what you can do upstream by loading the container in pre-sorted consignments so that from the port the haulier can make direct deliveries to regional distribution centres, outbases or even stores en route to the NDC. Obviously this is impractical if consignments for individual locations are too small.
It also presents significant challenges to buying, merchandising and departments to work together and plan sufficiently far ahead to give precise packing and scheduling directions to overseas suppliers or handling agents. That”s not so difficult with new lines as initial allocations are usually fairly consistent and planned well ahead, but for commodity or continuity products where local demand can vary dramatically it does require joined-up IT systems and real-time operations which enable enhanced supply chain visibility.
This sort of pre-load planning could, however, be especially useful at Christmas or other key seasonal selling periods: stores know well in advance how their allocations will be made when the seasonal products hit the shelves in mid-October, early spring or whenever is appropriate, so it should not be difficult to send all this information to handling agents or 3PLs in the Far East so that containers can be packed by store consignment ready for drop-off en route from the port.
The second – and possibly more flexible – option is to look at deconsolidation services at the port: this is an area where 3PLs can deliver real added value. Deconsolidation centres can unpack and sort container loads into delivery to local stores, outbases or NDC. If the retailer operates their own transport fleet then a high proportion of these goods can be backhauled by empty trucks returning to the NDC.
This sort of operation is still quite unusual but the savings can be very significant. At DHL we”ve recently started a deconsolidation project with one of our customers: in total – with deconsolidation, double deck vehicles, outbases and a review of store delivery times to increase efficiency – we”ve managed to cut distribution costs for the business by 25 per cent.
Although use of outbases has grown steadily in recent years there is still more that can be done to improve efficiency here. Outbases may be simple trailer changeover points which can increase vehicle usage by avoiding the need for drivers to spend a night away. Or they can be more sophisticated cross-docking facilities transferring products from large double-deck trailers to rigids or small articulated vehicles for delivery to local town centres. Cross-docking is obviously more expensive but where time is important in ensuring that shelves remain full it can often be the preferred choice.
Deconsolidation at the port or expanding cross-docking opportunities have obvious benefits. More difficult to accept for many businesses running their own transport fleets is that using your own is not always the best solution. Your own transport can be great if you are delivering a full load or half a dozen pallets to a single location but if the consignment is likely to be less than a pallet then opting for a parcel carrier could be the more cost-efficient option. As a simple guide, we would argue that for half a pallet or less, a next day parcel courier service will be more efficient than sending your own transport. For loads of more than half a pallet, but less than two or three, then using a pallet network is more cost-effective. Only when you get to multiple pallet loads is it worth using your own vehicles and drivers.
This can be an unpalatable truth for many transport managers and supply chain directors who believe that their fleets should be used whenever possible. However, some very careful arithmetic is needed to decide just what is viable to keep in house and where greater savings can be made by contracting out certain activities. Savings of around 10 per cent of transport costs are not difficult to achieve by a careful analysis of alternative services.
Rising fuel costs also mean that we must all start looking at ideas which challenge accepted beliefs. Marks & Spencer, for example, is one of several retailers implementing the new teardrop trailers which improve aerodynamics and thus reduce fuel consumption. The 10 per cent or so saving in fuel costs such trailers achieve, has to be balanced against increased vehicle cost, but with crude oil approaching $100 a barrel – and with a growing number of local authorities introducing charges for less efficient vehicles – investing in modern and environmentally friendly transport becomes a more attractive option.
Improving the aerodynamics of our trailers is just a start. We are seeing trials and experimental modes of transport across the industry to reduce fuel consumption and carbon emissions. The first train to bring goods direct from Beijing to Hamburg managed the journey in 15 days: a scheduled service is planned from 2009 dramatically cutting the cost of bringing time-sensitive products to Europe. There is talk, too, of developing Black Sea ports to receive container loads from the Far East, again cutting time at sea – and, by adding deconsolidation facilities, presumably also reducing delivery miles involved in reaching many parts of Germany and central Europe.
While fuel costs may be the key current driver forcing logistics companies and customers to reconsider their day-to-day activities, environmental issues are becoming even more significant.
We are currently at one of those distinctive tipping points in the supply chain that seem to occur every decade or so. In the 1980/”90s it was the move to centralised distribution that transformed supply chain efficiencies. In the ”90/”00s it has been the move to sourcing from low cost countries and globalisation. As we head towards 2010 it is going to be the need to cut both fuel costs and carbon footprint: reducing empty running, cutting road miles, looking at alternative energy sources, considering shared transport or outbases, and selective out-sourcing.
We also need to look at warehouse design to support improved stock turn without increasing the warehouse footprint – but that”s another story.
Nigel Gallier is business development director at DHL Exel Supply Chain – Home & Specialist Retail.
- Distribution companies can no longer depend on traditional cyclical trends in economies to deliver good times again: they have to accept that what goes up doesn’t always come down
- By looking at ways to integrate their secondary distribution channels with activities at the port, companies can significantly cut their transport miles and fuel costs – reducing carbon footprint
It can take a pharmaceutical company 15 years to bring a drug to market. Improving the clinical trials supply chain can reduce lead time.
When it comes to strategic outsourcing, cost and service benefits can be taken for granted – the key factor to look for is innovation.