Retailers push the logistics learning curve
David Hannon, Associate Editor -- Purchasing, 9/2/2004 2:00:00 AM
As many manufacturing markets become more competitive and product margins wither away, companies are taking a keener interest in supply chain and logistics strategies to gain a competitive advantage. And while it may be a new strategy to some manufacturers, it's a strategy most retailers have had in place for a long time. Logistics is typically a bigger priority for retail organizations due to the consumer-based demands of the industry and retailers can provide some excellent benchmarking opportunities for manufacturers.
Noha Tohamy, analyst at Forrester Research in Cambridge, Mass. points out that logistics--both inbound and outbound--is a much higher percentage of a retailer’s spend, mostly because they do not have raw materials and manufacturing costs. And the higher the percent of spend, the more attention a function typically gets from the company overall. As a result, retailers and their suppliers are always pushing the envelope when it comes to logistics and supply chain strategies and spending. According to figures from research firm Datamonitor, U.S. retailers spent more than $118 billion on logistics in 2003, more than four times the next highest industry, consumer products.
Tohamy says retailers have traditionally focused on the distribution side of logistics to get products from distribution centers to stores as efficiently as possible and have relied on big inventories to meet demand. But more recently, she says, they are looking to optimize the inbound side--from suppliers to distribution centers (DCs)--to minimize inventory requirements, a strategy that many manufacturers are also undertaking today.
Diversification
Mark Yoshimura, director of transportation at Office Depot in Delray Beach, Fla., says priorities such as dealing with a global supply base, outsourcing logistics, moving to leaner inventories and increasing technology in the supply chain impact retailers as much as, if not more than, they do manufacturers. Office Depot’s multichannel sales strategy has led the company to create two separate supply chains: one for its retail and store shipments and another for its “business delivery” customers, which includes catalog/web site buyers and a growing list of corporate accounts. The company uses a network of 32 cross-dock facilities, which serve either one or both channels.
Globalization is a big issue for retailers’ supply chain organizations, just as it is with manufacturers, according to Tohamy. “For example, if a retailer is sourcing from Asia, does it make sense to consolidate shipments in Asia or at the distribution center in the U.S.? Most of the retailers are trying to establish visibility and find out how much it is costing them to ship and if there are areas to improve that.”
Retail electronics giant Best Buy of Richfield, Minn. has established a sourcing group in Asia that works with suppliers on product development and sourcing. And within its logistics organization, there is an international strategy organization working to establish better direct import procedures to bring products from suppliers in Asia direct to Best Buy distribution centers. Chuck Dow, director of logistics at Best Buy, says the trend has proven the importance of logistics within the supply chain and “brought logistics an equal seat at the table” in many corporate planning and strategy meetings.
InFocus Corp. has a unique perspective on the retail supply chain. As a manufacturer of digital projectors, InFocus understands the manufacturing supply chain and globalization trends well. But a recent push to diversify its sales channels and sell more to retailers has been an education in supply chain success.
“The traditional retailers and food companies have always been very focused on supply chain velocity, especially the food industry where shelf life drives everything,” says Kyle Ranson, president and COO of InFocus in Wilsonville, Ore. “There’s a lot of learning there that can be applied to manufacturing industries. As a supplier, retailers are our most demanding customers.”
Figures from Datamonitor show retailers outsource roughly half of their logistics operations and performance of those service providers and the supply chain overall is a high priority. Because they are closer to the consumer, retailers track customer satisfaction and the performance of carriers more closely than the typical manufacturer, says Tohamy.
To meet the packaging, shipping and palletizing demands of its expanding list of retail customers, InFocus brought in UPS Supply Chain Solutions. When retail giant Costco asked InFocus to bundle its projectors with screens for display and sale inside the stores, InFocus would have had trouble meeting that request were it not for UPS’ experience in the retail industry.
“We were storing all our product in Oregon and shipping to all points in the U.S., which didn’t make sense and became more evident when we entered the retail sector,” Ranson says. “Now UPS centrally warehouses our products and ships to all of our channels whether it be a truckload to a distributor or a single item to a consumer.”
Retailers are striving to get more control of inbound freight decisions from suppliers, like their manufacturing brethren. Office Depot has taken an outsourcing approach for managing its inbound supply work, enlisting technology-heavy 3PL Transplace to help gain control, improve visibility and reduce inbound supply costs.
Even a company with the leverage of Best Buy, which spends $400 million annually on transportation services, has to work to gain more control of its inbound freight. The company currently has about 40% of its freight coming in collect and the rest is prepaid, according to Dow.
“We are working with suppliers to convert, especially under our direct import strategy. As we enter into agreements with suppliers to become direct importers, we’re including terms that change suppliers to collect to let us better manage the shipments and cost.”
To keep its logistics and supply chain strategies consistent across its multiple channels, Office Depot has created one consolidated supply chain organization reporting up to an executive vice president of supply chain. In the past, supply chain operations were too fragmented, Yoshimura says. The new organization has responsibility for inbound and outbound shipments across all channels.
“Like many retailers, we had a supply chain organization where replenishment reported to merchandising and distribution reported to sales,” Yoshimura says. “When the supply chain organization is too fragmented, the different silos take different strategies. We now have all those under one supply chain organization and we can share resources better and avoid duplication of efforts.”
Collaboration
The high-tech industry is known for connecting electronically with overseas suppliers for logistics efficiencies, but Tohamy says top retailers are far along in that model, especially in their overseas relationships. “Channel masters” like Wal-Mart and Target are using advanced online tools to connect with suppliers for improved supply chain visibility. Wal-Mart uses its RetailLink supplier portal to gain this kind of information.
The seasonal demands of the retail industry have also driven retailers to work in areas of collaborative planning, forecasting and replenishment (cpfr) and make supply chains more adaptable to spikes or drops in demand than typical manufacturers. Tohamy says most retailers keep 80%-85% of logistics under contract because of that seasonality factor, saying, “When the demand hits, they want a carrier that they have a stable relationship with.”
But for the forecasting strategies to be truly effective, Yoshimura says both suppliers and retailers have to participate in collaborative forecasting. As a first step toward those goals, Office Depot recently signed on with UCCNet, a data synchronization and standards-compliance organization targeted directly at the retail industry.
Best Buy is also very active in cpfr both within its company and within the industry. Two years ago, the company brought in technology provider i2 Technologies to develop a module specifically for cpfr within Best Buy.
“That initiative was so popular with our top suppliers that we migrated it to the WorldWide Retail Exchange to let other retailers leverage the capability,” says Dow.
Technology
Beyond the cpfr tools being implemented at retailers, shipment tracking is a high priority for retailers. Best Buy was one of the earliest adopters of a transportation management system, dating back to 1999. Retailers are heavily leveraging EDI technology to track supplier shipments better. Yoshimura says by combining advance shipping notifications and EDI data with visibility into when its facilities receive product, Office Depot can not only see if a product is late but why it is late. “It helps us gain improvements quicker. If you don’t understand why something failed, you’ll just be arguing about whose fault it really was.”
Regional department store chain Boscov’s of Reading, Pa. is buying more product overseas and Harry Roberts, senior vice president and CIO, says getting those shipments into an electronic system for tracking is a top priority. Currently about 60% of inbound shipments come with electronic documentation and Roberts wants at least another 20% in that category.
Boscov’s has worked with technology provider QRS of Richmond, Calif. on EDI and data synchronization initiatives. Boscov’s work in EDI goes back five years and has been spearheaded by Tom Pietrowski, director of logistics systems. Pietrowski started in the IT department and worked closely with the DCs and identified a need for a more robust EDI program. Boscov’s suppliers began providing electronic purchase orders and advanced shipment notifications to streamline the receiving process, but there was still a black hole in the time the goods left the supplier’s site and when they arrived at the DC.
To provide that visibility, Boscov’s is working with QRS on a shipment tagging and tracking initiative, which will let the company notify its trading partners if they haven’t shipped within a certain time of the ship date on the purchase order. “It allows our buyers to see this information and see the exceptions instead of the rules,” says Pietrowski. When suppliers see where a shipment went awry, they will be more likely to avoid that problem in the future, especially under more stringent importing regulations.
“A big part of our work with QRS is to get more of our shipments from overseas into an electronic data format to process them more efficiently at the DC,” says Roberts. “I think retailers have to use technology in their logistics. We’re all trying to get leaner and leaner in inventory, so we’ve got to know where the shipment is, when we can process it through our DCs and get it out to our stores. We want goods showing up when we need them for promotions and seasons. The days of holding a season’s worth of inventory in the DC are gone.”
And Wal-Mart is not the only company pursuing rfid as a long-term strategy. Roberts says once the benefits of rfid are proven, the retail industry will move to the technology much quicker than it has to EDI and other technologies. Best Buy has various rfid technologies working now to see where it makes sense to address rfid technology as it becomes more of a staple in the industry, says Dow.
Ranson says InFocus is carefully watching the growth of rfid technology and learning how it can benefit its internal operations instead of implementing the technology only to appease its retail customers.
“The rfid tagging could be very beneficial to suppliers selling into retail because the point-of-sale data from retailers usually lags significantly compared with the data from selling direct,” Ranson says. “If your product is going through multiple channels to a retailer you may not see what’s sold to the end user for a couple months and you can’t adjust manufacturing to meet demand in a timely fashion. rfid can provide updated point-of-sale information and let suppliers adjust the factory build on a real-time basis to meet the needs of the consumer and avoid the mismatch.”
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