Bypassing the warehouse

Speed is of the essence for manufacturers, particularly as market demand increases. And firms are always on the lookout for new ways of beating the competition.

Investment in electronic systems means that retailers, suppliers and now customers can tap into information on their computer systems and find out what is happening to their products along the supply chain.

But consumers are demanding more for their money, within shorter lead-times. Firms are in a double bind, needing to cut costs, improve customer service and provide finished goods in a fraction of the time. Concentrating on core businesses and outsourcing the rest seems to be their best option – at least it is one firms are taking.

“More and more firms are outsourcing distribution,” says Howard Price, principal consultant in KPMG’s supply chain practice, “even major supermarkets are doing it.”

Increasingly, distribution facilities are owned by third parties. And outsourcing distribution to a third party is just one of the developments taking off in industry worldwide. Inventory is now also being managed by third parties.

“We take ownership of the inventory,” says Paul Clarke, business development director in manufacturer logistics at distributor Wincanton.

Dealing with large stock orders requires new ways to move large batches around. Clarke points out that although the trend is to move towards “stockless distribution”, there is a need for some stock-holding and technology that can move and distribute that stock at a moment’s notice.

“Manufacturers are asking how they can best react to variable order quantities,” Clarke adds. “Automation is becoming a trend within warehousing. Logistics and distribution firm TNT Express Worldwide has an automated parcel sorting system and there is no reason why that could not come into regional distribution centres if you need to shorten lead-times even more.”

Build-to-order production has also changed the face of distribution centres.

At cross-docking points, firms share transportation costs, share the same carriers and forego having their logos emblazoned on their own lorry fleet.

Shared-distribution in the US is steaming ahead with large garment producers shipping their products straight to the customer and completely by-passing warehouses.

“TNT, DHL and Danzas are managing products from the factory to the end customer,” says Mark Simmons, partner in charge of the UK supply chain at Ernst &Young. “They make a business out of transporting and managing inventory. Manufacturers won’t even need a warehouse.”

Cost efficiency is all about efficient customer response, market pull, and low inventory. The electronics industry postpones the assembly of its products until the very last moment/distribution point. Then, if any errors were made earlier on in the ordering process, they can then adapt products to customer need.

“The industry sells any configuration of computer, any machine the customer wants, without incurring the cost of stocking these in warehouses,” says Gary McIlraith, partner in charge of supply chain at KPMG.

“Businesses need to improve financial and market performance in response to customer demand,” says Ernst & Young’s Simmons. “Rationalised distribution means fewer inventory carrying facilities.”

The break-down of EU borders has helped rationalise distribution points and enabled more efficient route management.

“It is moving beyond efficiency, to leaner Just in Time delivery. With cross docking facilities, stock will not stop in the pipeline, but flow at speed. The entire chain is regulated and monitored by IT, which gives control and visibility, regardless of who controls it,” Simmons adds.

“Rail companies are trying to take the trucks off the road in the US.”

Managing consultant Deborah Hough is leader of the supply chain centre of excellence at Cap Gemini. She says Peapods, the US electronic commerce food retailer, has cut costs in the distribution chain and will deliver goods straight to the customer for a premium.

“There are three layers to the supply chain, but you could argue, does the retailer have a role to play here,” says Hough. “If you are an Excel logistics firm, why not offer yourself as a service provider.”

Using economies of scale, firms can mass produce; using electronic commerce firms can produce made-to-measure goods; using both together, with the help of the Internet, they can achieve a quicker and more timely service.

Shortening the route to market, through the Internet straight into your living room, is the competitive weapon firms have been waiting for.

When the Internet is accessed by the average person through the medium of television, the predictions are that business will boom, and distribution and supply chain costs will be halved.

“When the Internet hits TV it will blow the demographic mix wide open and transform the Internet to the most significant way forward for electronic commerce,” says Jonathan Barling-Twigg, consultant for KPMG’s management consulting practice. “The number of people on the Internet is expected to increase exponentially from academics and students to a broader demographic mix.”

Firms have already begun experimenting: BT has been pitching interactive television to customers and suppliers alike. In the US, firms are trailing Web Television. The aim is for all homes to have a little modem-like box that sits on top of the television. This plugs into the television and telephone lines and uses Worldwide Web browser software.

“When the Internet makes the break from computer screen to television lounge and captures audiences, the potential for new business and high rewards is more tangible.” Barling-Twigg adds: “The Internet starts to level the playing field and the cost is potentially lower than it has been ever before – the levels of efficiency are significant.”

With the barriers to competition and the barriers to market lowered, the service providers can deal direct with customers, providing a more integrated service.

Airlines are facing sharp competition, with some already going out of business in the US. They are being forced to cut costs in all areas, and improving the efficiency of distribution channels is essential. Cutting out the middle man by using the Internet appears to be a lucrative option-mainly because of its flexibility.

Some firms are ahead of others: American Airlines is offering an Internet auction service for last minute tickets, with a minimum value of $150.

Paul Wignall, executive consultant for Ernst & Young’s multimedia and telecoms practice, says: “We are seeing the development of second-hand markets on the Net and could see a surge in brokering services, as well as a series of intranets, where you have to be a member to find out about a product and get it at a competitive price.”

Security on the Internet is the reason why business has not taken off, Simmons at Ernst & Young argues. But some businesses are already looking at ways it can be used to monitor the supply chain.

“Security is a risk for distribution management, but I have heard of companies that are using intranets to post schedules for moving products,” he says. “There are rumours that the parcel companies are also enabling customers to go into the Internet to track down their parcels.”

TNT Express Worldwide has set up a new product, Euro 1, that picks up goods as late as 9pm and delivers by 9am the next day.

“We put track and trace systems on the Internet,” says TNT. “The whole process is electronically controlled and we integrate our systems with our customers.”

Logistics companies that provide transport services are providing an additional information service for customers through global positioning system intranets. Customers can log into those and gain information about their shipments anywhere in the world.

“Although in its infancy, the Internet could make Electronic Data Interchange (EDI) redundant,” says Howard Price, principal consultant in KPMG’s supply chain practice. “The Internet is ideal, if only it were sufficiently secure; you can track whatever material is being shipped and it’s incredibly cheap.”

Intranets and the Internet are enabling smaller firms and new market entrants to encroach on territory held by larger firms, particularly as the velocity of passing information increases.

“Businesses do not have enough information on distribution, it’s often late or inaccurate,” Richard Davey, director responsible for air transport at Price Waterhouse says. “Quality information is essential.”

The airline industry is looking at combining boarding cards with tickets and using them as smart cards to collate information about customers.

Barling-Twigg says: “For manufacturers and retailers, getting the right information to support transport from the customer to the service supplier quickly and accurately is key to gaining competitive advantage.”