The key principles in managing supply chains are control, cost and efficiency and, during the past two years, the UK’s multiple retailers have sought to more fully achieve these goals through the introduction of factory gate pricing (FGP). Currently, the picture remains mixed with different retailers interpreting FGP in various ways while some manufacturers are deeply concerned about the negative impact FGP could have on their costs and ability to maintain their own logistics operations. Others have embraced it as a means to shed overheads as well as the responsibilities of serving highly demanding multiples.
However, while today’s scenarios may lack uniformity, this cannot disguise the fact that FGP is happening now and will eventually prevail in the UK’s fast moving consumer goods (FMCG) logistics operations.
Meanwhile, another demand on supply chain thinking has steadily emerged. As British manufacturers increasingly move production overseas or source more materials and components abroad, and as the multiples place greater focus on non-food merchandising, there is a pressing need to dramatically revise international logistics practices. In the drive to remain competitive, many non-food products are manufactured in the lower wage economies of the Far East, India and Eastern Europe and, with the removal in 2004 of quotas by the World Trade Organisation, this is set to significantly increase.
Clearly, international supply chains are inherently more risky than national operations – they are dependent on sea freight or on Eastern Europe’s road freighting systems; they are subject to an array of customs regulations; there are implications for quality control; and efficient replenishment is a much greater challenge.
The problem for many companies now engaged in global purchasing is that they are treating their international supply chains as if they were local and rooted in the days before FGP was thought about. As a result, they continue to charge suppliers with delivering products to a distribution centre in the country of final purchase – the process of Delivered Duty Paid (DDP). It is currently true that – as with national supply chains – there is no single optimum model for international logistics, and, indeed, retailers and manufacturers may well need to operate within several systems at the same time.
However, many companies are simply failing to examine the options at all with the result that they are seriously risking their future survival. Unless they achieve an end-to-end supply chain capability where control and visibility are the key enablers – whatever the geographic extent of their supply chain – costs will escalate while customer service and ultimately profitability will decline.
The challenge is not to be underestimated – the process changes, requirements for new investment in facilities, IT and transport structures as well as the challenge of quickly building the necessary knowledge base are too complex and expensive for most companies to justify alone. Increasingly, therefore, collaboration will be fundamental – between suppliers, between retailers, manufacturers and their suppliers and, for all parties, with global third-party logistics providers (3PLs).
On the reward side, the benefits to be gained from collaborative, integrated international supply chains are likely to be even higher than within national operations. It is estimated that in the clothing industry, for instance, there is the potential to reduce design to delivery cycle times by 30% to 60% through intelligent international buying processes.
Supply chain costs
The starting point for any company seeking to analyse its inbound strategies must be to understand its sources – the true origins of supply, the number of suppliers in each country and the volumes they represent. This can be surprisingly obscure but is essential to establish in order that they can understand the supply chain costs in each region and thus the financial impact of sourcing decisions. On the basis of such an origin modelling exercise, manufacturers and retailers can develop a meaningful cost-to-serve model for each geographic area from which they can identify the approach to supply chain management they should take in each region.
A priority must always be to drive out unnecessary costs by avoiding Less than Container Loads (LCLs) leaving the source country. At the retail end of the supply chain, this may involve work with the buyers in establishing different planning and ordering processes. At the supply end, in a region where a company is purchasing large volumes from just a few suppliers, a reasonable option may well be to select one lead supplier to manage the second tier suppliers, consolidate goods across the region and then take on responsibility for onward transport to the country of destination.
By contrast, where both volumes and the number of suppliers are low and dispersed across a wide area, a better approach might well be to ship products to a consolidation centre in just one country in the region so that full loads can be put together at this point for export. At Exel, for example, we have helped clients reduce movement costs from low volume origins by some 35% using three large regional hubs in Hong Kong, Sri Lanka and Singapore, all of which are bonded so duty is not incurred.
A third approach is what we call “Origin Management”, which applies to regions of high volume and large numbers of suppliers. It includes both the strategic and operational processes that are the capabilities of global 3PLs in the generation of efficient and integrated supply chains as well as the infrastructure they are able to establish.
Under the concept, the purchasing company buys the products “ex-works” at the factory gate and its logistics provider takes over responsibility for their shipment from this point. The 3PL brings volumes together and carries out such final stage processes as quality checking, labelling, re-packing, re-working and co-packing, in its consolidation centres in the country of origin, thus reducing both costs and delays. In other words, a FGP model is established, similar in many respects to that which the multiples are initiating in the UK and with the similar objectives of driving cost and time out of the supply chain.
However, international FGP carries with it both additional requirements and potential benefits. One advantage of source country consolidation services is that, if managed by one 3PL, they can represent uniform processes and operational procedures across the world. Furthermore, by holding strategically sourced product in this way, the logistics company not only reduces the inventory burden for both retailers and manufacturers, but is in a position to ensure that an effective stock replenishment process is put in place – a considerable challenge when product may be coming from a number of countries around the world.
Importantly, Origin Management also encompasses a range of planning and collaborative effort that troubleshoots problems and ensures that customers receive their goods as ordered. This can extend from purchase order planning to working hand-in-hand with the vendor company to ensure that the purchaser’s requirements are fully understood and acted upon, or from the management of trans-border movements to make sure retailers receive the goods they want within tight delivery schedules to masterminding equipment and vehicle movements so that they are in the right place at the right time. Effective Origin Management delivers end-to-end supply chain management.
Freight movement organisation
Overarching both strategic and operational activities, a logistics structure – the “Inbound Control Tower” – must be set up as a single point of control. This should deliver centralised command with full visibility for multi-site networks, improved purchasing and scheduling of sub-contracted haulage, optimisation of activity and improved vehicle use, standardisation of processes and common Key Performance Indicator (KPI) reporting.
In order to achieve this, the “Control Tower” needs to manage the entire logistics process at three levels. Firstly, it must ensure collaboration with buyers and merchandisers to design a supply chain in which product is moved efficiently. Secondly, at a tactical level, the “Control Tower” should organise freight movements to meet the requirements of the purchase orders placed by customers and work with manufacturing plants to arrange optimal pick up of products. Finally, at operational level, it should provide tracking and tracing of product movements and events along the physical supply chain, optimising transport movements to achieve additional savings that typically can reduce the cost base by up to 10%.
The use of new technologies is important, from container planning software to web-enabled track and trace systems, transport scheduling tools and – as yet to be fully exploited – Radio Frequency Identification (RFID). Still a relatively expensive and not entirely reliable technology, RFID currently lacks the international standardisation that would make it viable for global logistics but this is on its way and it will only take a small handful of major retailers to insist that their suppliers adopt RFID to ensure that its use is established in the delivery of end-to-end supply chains.
New logistics practices within the UK have already achieved much. Britain now boasts the lowest cost per tonne of movement anywhere in the world and this continues to decline. However, there is still much more benefit for UK companies to extract from their international supply chains and, as margins become ever tighter, the removal of even a small percentage of logistics operating costs, whether nationally or internationally, now represents a significant impact on the overall profitability.
Companies can leverage crucial competitive edge by understanding the supply chain options available and developing collaborative processes to better manage them. n
Simon Stacey is vice-president – supply chain at Exel. Tel: 07831 239968.