Steve Winwood, group commercial director of Culina Logistics, says the retail supply chain trend for shorter and leaner lead times is a challenge and a business opportunity
Retailers are encouraging their supply chain partners and suppliers to revise their delivery patterns so fresh/chilled products and ambient products can be moved with common processes and schedules. This goes against perhaps 40 years of tried and tested practices but in making these changes the retailers expect to adopt, and be seen to adopt, leaner and more sustainable supply chains. The service providers face the challenge of delivering these changes but can also view them as new business opportunities.
Research published recently by the IGD appears to endorse this belief. This suggested around 60% of retailers expect lead times will reduce by up to one day over the next five years. More than half of manufacturers agree. The majority of retailers (54%) and manufacturers (67%) also expect order frequency will increase over the same period.
Most retailers have in the past employed different ordering and delivery processes for their fresh/chilled and ambient products. A typical chilled product ordering process works on what is known as day-one-for-day-two. Orders placed by a specified time on the first day will be picked and despatched for shipping and delivery overnight or on the following day. Each category of product (such as meat, produce, dairy and fresh juice) typically has its own delivery window so each order arrives at a specific time. A number of retailers require a drop-and-drive process, which minimises the amount of in-bound checking and paperwork. Instead the order is checked for completeness at the point of picking so stock spends as little time as possible in transit before going on sale.
Ambient products, on the other hand, are often delivered over a day-one-for-day-three cycle. Here, orders received on the first day are picked on the second and delivered on the third. Deliveries are made at pre-booked times but will vary from day-to-day, which means there is less certainty of vehicle availability on the day. In this scenario, most retailers prefer to complete all checks on arrival and provide a signed proof of delivery, known as POD, at the end of this process. The advantages here include maximising order success rates and minimising the number of returns.
These models have developed to create supply chains geared towards ensuring fresh/chilled products have maximum shelf life. This is good for retailers because it presents the maximum opportunity to sell before a product reaches its sell by date. Similarly, although they may not always appreciate it, this is also good for consumers because they have longer to eat or drink the product after they have bought it.
To a certain extent, the argument goes, deliveries of ambient products do not need to be as quick. But times are changing and retailers are beginning to realise employing two different delivery processes is not always efficient. Aligning both fresh and ambient products into a single day-one-for-day-two process should lead to efficiencies in a number of areas.
The benefits are clear. The retailer has a simpler ordering process geared towards replenishing stock on the following day and aligned with sales patterns. The retailer will also see significant reductions in working capital by operating the ambient supply chain in the same way as the current fresh/chilled supply chain. This will lead, however, to improved stock availability on the shelf, where it counts most, for improved customer service. For smaller retailers there will be a reduced requirement for holding stock in store rooms at the back of the shop. This means more floor space can be dedicated to selling or, alternatively, the pressure to add costly storage facilities to support bigger volumes or faster throughput is avoided.
This change in the ambient supply chain does, however, have significant effects for the retailer’s supplier who inevitably will need to hold additional stocks within its supply chain. Suppliers will also need to react far more quickly to requests from the retailer at a time when accurate forecasting is getting ever more difficult to achieve.
In the middle of all this is the logistics provider, which may need to revise its own processes. The shorter lead times implied by day-one-for-day-two will mean an increased and more flexible requirement for warehouse storage, but also greater reliance on cross docking for consolidation. This could have implications for the design and layout of the warehouse but also the equipment, technology and processes employed. Beyond this the information systems in use – from order processing, warehouse management, order picking, vehicle loading, and delivery routing and scheduling – will probably have to work more closely than ever before to ensure seamless, real-time support for the real-world business. Interfaces with upstream (ie retailers) and downstream (ie producers and suppliers) information systems will also become more crucial and, ultimately, embedded within the supply chain.
The challenge facing producers and their logistics providers is how to achieve this new aligned model while maintaining efficient delivery channels and high customer service levels, and delivering both on a cost neutral basis. The UK retailer supply chain model is very well developed and changes, however small, could have major potential for disruptions which is clearly in nobody’s interest. Supply chain service providers are likely to respond by bringing new standard operating procedures into their core operations, developing new services to add value and by forming alliances that support greater consolidation and collaboration.