Working together to meet the needs of the consumer

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Working together to meet the needs of the consumer

• Andrew Morgan Managing Director, Supply Chain
  Europe Limited

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Supply Chain Europe Limited

• Founded 2003
• Offices in Cheltenham (UK) and Sao Paulo (BR)
• Special focus on international supply chain
• UK, Europe, Latin America
• Experienced professional team
• Working together since 1990
• Portfolio of services
• Consultancy
• Project implementation
• Approved Training Centre for CILT(UK)
• Relationships with Cranfield and Loughborough
  universities in UK
• Report on Cranfield supply chain collaboration
  project to be published in November 2005

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Topics

• Supply chain management as a critical factor in
  business success
• Meeting the challenge of collaboration
• UK retailer experience

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SCM as a critical factor in business success

• The goal of supply chain management is to link
  the market place, the distribution network, the
  manufacturing process, and the procurement
  activity in such a way that customers are
  serviced at higher levels yet at a lower total
  cost.
• Professor Martin Christopher, Cranfield
  University
• The short history of grocery retailing in the UK
• Centralised distribution
• Availability on the shelf the last frontier

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The current situation in UK grocery retail

• 11 of all enterprises in the UK are retailers,
  with 184,695 VAT- registered businesses operating
  278,630 retail outlets
• UK retail sales in 2004 were c. 246.3bn, more
  than the combined economies of Switzerland and
  Ireland
• Over a third of consumer spending goes through
  shops
• 30p in every 1 is spent in the top 8 retailers
  Asda, Iceland, MS, Morrisons/Safeway,
  Sainsburys, Somerfield, Tesco, and Waitrose
• Over the last decade, the price of goods in shops
  rose by only 7, much less than the 27 increase
  in the all-items Retail Price Index
• The retail sector employed 3.1 million people as
  at the end of December 2004, i.e. 12 (1 in 9) of
  the total UK workforce
• Over the past five years, retail employment has
  grown by 343,200
• Source Office for National Statistics

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A short history of grocery retailing

• 1950s
• Food rationing ends although food remains in
  short supply
• A frugal diet for most of the population
• Launch of the self-service supermarket format
• No national retail food chains
• TV advertising promotes branded food products
• Manufacturers set retail price of their products
• 1960s
• Repeal of the Price Maintenance Act allows
  retailers greater freedom to compete on price
• First motorways built making it economical to
  distribute food over longer distances
• Supermarkets become large enough to deal with
  manufacturers directly, rather than buying
  through wholesalers

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A short history of grocery retailing

• 1970s
• UK joins the European Community and the Common
  Agricultural Policy
• Major food surpluses in Europe e.g. butter
  mountains, wine lakes but also occasional
  shortages e.g. sugar, toilet tissue
• Scanning first introduced to stores, replacing
  the traditional price tickets
• Supermarkets move beyond their traditional range
  of packaged products and begin to sell more fresh
  foods including meat, fish, dairy, fruit and
  vegetables
• Marks and Spencer develop new chilled products,
  e.g. desserts and ready meals
• 1980s
• Rapid consolidation of the retail market with
  Sainsburys, Tesco, Gateway, Asda and Argyll
  emerging as front runners
• Coop relinquishes its position as the UKs
  leading grocer
• Major decline in local specialist stores
  (butchers, bakers, greengrocers, etc.)
• Superstores (over 25,000 sq. ft.) replace smaller
  supermarkets
• Supermarkets centralise their purchasing (buying
  through head office) and distribution (suppliers
  deliver to RDC)
• Growth of the fast food sector pizzas, burgers,
  kebabs
• Steep rise in proportion of own branded products

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A short history of grocery retailing

• 1990s
• Supermarket chains achieve national coverage for
  the first time
• Continental discount retailers (Aldi, Lidl,
  Netto) arrive in the UK
• Sunday opening legalised, 24hr opening in some
  stores
• Supermarkets become leading petrol retailers
• Farming sector slumps
• Some retail chains expand overseas and Wal-Mart
  acquires Asda
• Rapid uptake of the Internet prompts launch of
  home shopping services
• Merger of CWS and CRS 2 leading co-operative
  retailers
• 2000s
• Rapid growth of non-food product ranges in Asda
  and Tesco
• Industry growth at lowest level in 30 years
• Expansion of supermarkets into convenience
  retailing
• Morrisons acquires Safeway and Iceland merges
  with Booker
• Continuous change over the last 50 years

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Centralised distribution network (Tesco 2001)

• 2,000 suppliers working at 98.5 service level
  and 2 day lead times
• Distribution centre (DC) network
• Ambient grocery 10
• Fresh and frozen food 13
• Non- food 6
• KPIs
• Supply chain costs as of sales
• Service levels (availability)
• Lead times
• Inventory no. of days held

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Centralised distribution - outsourcing

• Typical DC Didcot (Oxon)
• Building area 27,000 sq. m.
• Temperature regimes (frozen, chill, ambient)
• -250C 10C 120C
• Human resources
• 50 management and 721 staff
• Operates 24/7
• Services 144 stores
• Throughput
• Handles 6,000 product lines
• 100 pick by line (short-life goods within 24hr
  cycle)
• Delivered volume 2004/05 98 million cases
• Ave. week 1.48m cases picked and 1.9m cases
  delivered

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Centralised distribution focus on costs (Tesco)
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Availability on the shelf the last frontier

• Current focus
• J Sainsbury difficulties
• Boom in home shopping / Tesco store picking
• Roland Berger survey Optimal Shelf availability
  (2003)
• Out of stocks generally in range 5 to 10
• Up to 10 to 15 at weekends
• Up to 15 to 20 for promotions
• Estimated cost of lost sales from 2bn to 3bn
  per year
• ECR UK quarterly survey (IGD June 2004) of 200
  products at 350 stores all major multiples
• 2004 Q1
• On-shelf availability from 91.7 to 98.3
• Only 3 stock keeping units (SKUs) at 100
• 2004 Q2
• On-shelf availability from 93.9 to 98.3
• 6 stock keeping units (SKUs) at 100
• Even with availability in the high 90s a
  customer wishing to buy one item from each of 12
  categories has less than 60 chance of buying
  exactly what they want

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Meeting the challenge of collaboration

• Why collaborate?
• Critical aspects
• Commercial strategy
• Supply chain strategy
• Business process
• Technology support
• People and management
• Openness and trust in the supplier / retailer
  relationship

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Why collaborate?

• Commercial imperative for sales and profit
• Supply chain complexity
• Broad alignment between manufacturers and
  retailers supply chain imperatives
• But manufacturers have to respond to a plethora
  of supply chain initiatives
• Home delivery, Factory Gate Pricing, ECR, lean,
  on-shelf availability, RFID, collaboration,
  merchandisable units, etc.
• Also different supply chains within the retailer

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Critical aspects

• Commercial strategy
• Determines complexity no. of SKUs, promotions,
  rate of New Product Introductions, trade terms,
  etc.
• Supply chain strategy
• Determines inventory and replenishment policies,
  strategies for lean, agile and flow-through
• Business processes
• Planning and forecasting, customer service, joint
  approaches to replenishment and procurement
• Technology support
• No islands of data and information
• People and management
• Skills, attributes, incentives, organisational
  framework
• These components must be aligned for high levels
  of on-shelf availability

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Critical aspects commercial strategy

• Product range and space allocation
• Drives store inventory levels and replenishment
• Promotional strategies and pricing policies
• Every Day Low Pricing (EDLP) lean supply chain
• Hi-Lo requires more agility
• Trade terms
• Frequency of replenishment (full load? little and
  often?)
• Factory Gate Pricing (FGP) synchronisation
  through control (not same as ex-works)
• (Seasonal) events policy
• Accustomed to Christmas, Easter, Valentines Day
• Now sporting and media events
• Requires agility

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Critical aspects supply chain strategy

• Different supply chains within the company
• Fast vs. slow-moving lines need different
  infrastructure
• Why send a case if weekly velocity is less than
  case quantity? Overstock and risk of damage or
  loss
• Push vs. pull
• Move towards pull
• Events require push
• Local vs. global sourcing
• Responsiveness is an issue
• Possible to design out uncertainty
• Must be aligned with commercial strategy

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Critical aspects business processes

• Lack of collaborative planning and forecasting
• Inadequate exchange of information
• Different forecasts, SKUs, pricing, etc.
• Supply managers vs. account managers
• Traditional manufacturing processes
• Large batch sizes
• Slow and inaccurate forecasting
• Lean but not agile
• Must be aligned and synchronised

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Critical aspects technology support

• Recent developments
• ERP, Internet, RFID
• Data (and information) potential
• Reality
• Prefer traditional planning, forecasting and
  scheduling instead of exploiting ERP
• Suppliers fail to use data made available on
  retailers extranets
• Toleration of poor data quality
• Potential exists to provide full visibility of
  the end-to-end supply chain

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Critical aspects people and management

• Key aspect
• Training and awareness
• Exposure to other functions? Organisations?
• Change management
• Core skill
• Roles and responsibilities
• Who is accountable for on-shelf availability?
• Skills and capabilities
• Ability to collaborate?
• Organisational structure
• Conflicting objectives?
• KPIs and incentives
• New mindset required

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Openness and trust in the supplier / retailer
relationship

• Complex supply chains
• Collaboration and communication instead of
  confrontation
• Alignment of policies and strategies
• Individual pilots and initiatives must be brought
  within a cohesive strategy with suppliers and
  retailers working together

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UK retailer experience J Sainsbury

• Lost sight of the basics
• Needs of the consumer
• Over-ambitious Phoenix Programme investment plan
• 1bn supply chain re-engineering project
• High-tech fulfilment factories (9 planned)
• Projected cost saving 600m per annum
• Result by mid-2004
• Stock everywhere except on the shelf
• Poor stock accuracy, poor availability, low
  morale
• Required step-change programme to improve
  on-shelf availability
• Had to get people to talk to each other
• Theres nothing here I havent seen before. I
  just havent seen it all in the same place at the
  same time before
• Laurence Christensen Supply Chain Director
• Brought in by Justin King, Chief Executive at J
  Sainsbury

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UK retailer experience Tesco

• Better for customers
• Giving value to customers in order to earn their
  lifetime loyalty
• Simpler for staff
• One-touch replenishment
• Cheaper (for supply chain)
• Eliminate non value-adding activities
• Remove inefficiencies
• Improve service / reduce waste
• Generate sales growth
• Free untapped resource
• Identify cost reductions
• Maximise scale buying opportunities
• Facilitate win/win situations

Merchandisable units one touch shelf filling
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Retailer sales results comparison
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Retailer profit results comparison
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Focus on the 4Rs

• Responsiveness
• Time-based competition is now the norm. The
  focus is on agility
• Reliability
• Unreliable processes create uncertainty and
  variability. Equally, lack of visibility adds to
  uncertainty
• Resilience
• Todays turbulent and volatile markets require
  supply chains that are capable of dealing with
  the unexpected and the unplanned
• Relationships
• As supply chains become more complex and as
  out-sourcing increases dependency on suppliers,
  the need for relationship management increases
• Professor Martin Christopher, Cranfield University

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Conclusion

• Supply chain management is a critical factor in
  business success
• Retailers show continuous change over 50 years
• Rise of centralised distribution
• Availability on shelf the last frontier
• Meet the challenge of collaboration
• Aligned strategies
• New business processes
• New ways of thinking and behaving
• UK retailer experience
• Demonstrates the relevance of supply chain
  management in achieving business success
• Suppliers and retailers that work together to
  meet the needs of the consumer will win in
  todays market