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2. Report Managing International Supply Chains Identifying best practice across borders 3. Institute of Grocery Distribution 2006. All rights reserved.No part of this publication may be reproduced, stored in a retrieval system or transmitted in any way by any means, electronic, mechanical, photocopying recording or otherwise without the prior permission of the Institute of Grocery Distribution, a registered charity and company limited by guarantee registered in England no.105680.IGD is the trade mark of the Institute of Grocery Distribution.Under the terms and conditions of this contract, IGD authorises you to;View and print out the material for personal use onlyExtract small amounts of text, tables and charts for inclusion within internal companydocuments for limited distribution. IGD must be referred to as the source of informationwhen this occursYou are not authorised to;Sell, license or dispose of the material for commercial or any other gainAlter the material in any wayFailure to adhere to these conditions will result in the immediate termination of your access to this information. 4. Who Are We? We aim to be the leading source of information, research and education for the food &grocery industry.We are unique in that we are the only organisation in the world that hasmembers from all parts of the food and grocery market, including retailers, caterers,wholesalers, distributors, manufacturers and farmers. From this unique position we are experts on the grocery supply chain and also have agood understanding of shoppers. We have no vested interests and we do not lobby. Webring the whole industry together to address issues and examine strategies for thefuture.What Do We Do? We are a one-stop shop for information, research and education for the food and groceryindustry. At IGD we are passionate about this industry and work hard to bring peopletogether to improve mutual understanding. Our main activities are: Producing business reports. Analysing developments and forecasting trends in thefood and grocery industry Running educational programmes. We run a variety of training courses and ourconference programme is renowned throughout the industry Keeping close to the shopper. We conduct regular consumer research tounderstand the big issues that concern consumers Bringing people together. We develop practical best practice guidelines that alsobenefit the consumer Providing free information. Fact sheets and industry best practice guides are nowavailable on-line free of charge and our information unit is there to provide answersto queries (the information unit service is only free of charge to members of IGD)For more information please visit our website: www.igd.com IGDGrange Lane, Letchmore Heath, Watford, Herts WD25 8GD, UK Tel: +44 (0) 1923 857 141Fax: +44 (0) 1923 852 531Email: [email protected] IGD 2006 5. Managing InternationalSupply ChainsJanuary 2006 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system ortransmitted in any way or by any means, electronic, mechanical, photocopying, recording orotherwise, without the prior permission of the Institute of Grocery Distribution, a registered charityand company limited by guarantee registered in England no. 105680. Registered Office: LetchmoreHeath Watford WD25 8GD (01923) 857141 Whilst every effort has been made to ensure that the information contained in this publication iscorrect, neither IGD nor any of its staff shall be liable for errors or omissions however caused.ISBN 1-904231-99-3 IGD 2006 www.igd.com/supplychain 6. www.igd.com/supplychain IGD 2006 7. ContentsList of Tables iList of FiguresiiiKey Findings and Executive Summary 11. International Supply Chain Barometer 131.1 IGDs International Survey141.1.1 IGD Research Methodology151.1.2 What is Your Business?161.1.3 Which Country Operation(s) Do You Represent?171.2 The Supply Chain Overview 181.2.1 The Definition181.2.2 Which Functions or Departments are Part of Supply Chain?201.2.3 How Important is Supply Chain in Your Companys Strategy? 211.2.4 How is Your Supply Chain Managed? 23Case Study - Unilever, Managing International Supply Chains 25Case Study - Zaras Vertical Supply Chain 271.3 Outsourcing 311.3.1 Penetration of Outsourcing to Third Party Logistics Providers 311.4 Supply Chain Challenges 351.4.1 What Key Challenges are Facing Supply Chain in YourArea of Operation?35Case Study - Superquinn & Coca-Cola HBC (Ireland) 372. Supply Chain Optimisation45 2.1 Optimisation Through Warehousing472.1.1 Centralised Distribution Hubs 47Key Focus - Distribution Parks47Case Study - Mattel, European Distribution482.1.2 Warehouse 'Sale and Lease-Back' Schemes 50Key Focus - Sale and Lease-Back 502.1.3 Consolidation and Shared-User Initiatives 50Case Study - Carrefour, France, Pooling 51Case Study - Gruppo PAM and Number 1 Logistics Group, Italy 52Key Focus - Reckitt Benckiser France, Shared-User Networks542.2 Technology in Supply Chain552.2.1 Automation and Automated Distribution Centres 55Key Focus - Automation in Tesco, UK 57Case Study - Automation in CVS/Pharmacy, USA57contd.../ IGD 2006www.igd.com/supplychain 8. Contents (continued) 2. Supply Chain Optimisation (continued) 452.2.2 RFID/EPC59Key Focus - Wal-Mart US, RFID Roll-Out61Key Focus - Metro/Nestl & SATO Germany, RFID 622.2.3 Global Data Synchronisation (GDS) 622.3 Optimisation Through Transport652.3.1 Factory Gate Pricing652.3.2 Cross-Docking 66Case-Study - Metro Group Logistics Germany, FGP andCross-Docking 672.3.3 Intermodality - A European Perspective69Key Focus - SPaP Bratislava, Inter-modal Hub Management 70Case-Study - Auchan France, Using the Canal Network 71Key Focus - ASDA UK, Use of Ports 73Key Focus - Kursiu Linija 752.3.4 4th Party Logistics Transport Management75Case-Study - Exel and Unilever UK Foods, Freight Management 763. International Differences and Emerging Markets773.1 Managing International Differences78Case-Study - Wal-Mart, Assimilating International Operations803.2 China Retailing and Global Sourcing 823.2.1 Key Developments82Case-Study - Wal-Mart, China83Case-Study - Carrefour, China 84Case-Study - Procter & Gamble, China853.2.2 Opportunities in Global Sourcing863.2.3 Challenges for Global Sourcing86Case-Study - Auchan Group, International Sourcing 913.3 India Retailing Opportunities 933.3.1 Distributors933.3.2 Sales Field Force 943.3.3 Legislation 953.3.4 Inventory Challenges963.3.5 National Brand Coverage 963.3.6 Infrastructure Challenges 973.3.7 Delhi versus Mumbai 973.3.8 Supply Chain Improvements 973.3.9 The Future98contd.../www.igd.com/supplychain IGD 2006 9. Contents (continued)3. International Differences and Emerging Markets (continued) 77 3.4 Central & Eastern Europe Supply Chain Restructuring 99 3.4.1 Supply Chain Advantages 99 3.4.2 Supply Chain Trends100 Case-Study - Tesco, Hungary101 Case-Study - Henkel, Central and Eastern Europe103 Case-Study - Carrefour Poland, Multi Cross Dock1054. Best Practice Supply Chain Management107 4.1 What Unit Measure of Performance Do You Benchmark? 109 4.2 External Benchmarks111 4.3 Availability 112 4.4 ECR Scorecard113 4.5 How do you Analyse the Root Cause of Success?114 4.6 How Do You Transfer Improved Performance to Other Parts of the Business?116 4.6.1 Formal and Informal Methods116 4.7 Enablers of Best Practice in Supply Chain118 4.7.1 People 118 4.7.2 Process118 4.8 Continuous Improvement & Re-Engineering Approaches 119 4.8.1 Business Process Re-engineering (BPR)119 4.8.2 Total Quality Management (TQM) 119 4.8.3 Lean Methodologies 120 4.9 Best-in-Class Companies121 4.9.1 Which Retailer Do You Most Admire? 121 4.9.2 Which Manufacturer Do You Most Admire? 124 4.9.3 Which Service Provider Do You Most Admire? 125 4.10 Top Supply Chain Projects 127 4.10.1 Demand Planning and Forecasting 127 4.10.2 Cost Management 128 4.10.3 Inventory Management128 4.10.4 Customer Service128 4.10.5 Production, Warehousing and Distribution128 4.10.6 Availability and Retail Ready Packaging 129 4.10.7 Data Issues and IT Improvements 129 4.11 In Summary130 IGD 2006www.igd.com/supplychain 10. www.igd.com/supplychain IGD 2006 11. List of Tables1. International Supply Chain Barometer13Examples of International Retail Expansion 14Companies Contributing to IGD's Survey Research15Sample Job Titles Responding to IGD's Research 16Views of companies with Supply Chains being of 'Medium' strategic importance 22Views of companies with Supply Chains being of 'High' Strategic Importance 22Organisational Structure 24Unilever HPC Critical Success Factors26Lead Logistics Provider by Supply Chain Management Structure 33Key Supply Challenges35Results versus Target402. Supply Chain Optimisation 45Solution Sets46The Process56The Process57Benefits of GDS63Short-Sea Shipping - Opportunities and Challenges74 3. International Differences and Emerging Markets77International Differences in Supply Chain Challenges78Opportunities for Global Sourcing 86Challenges of Global Sourcing 87Choosing a Distributor94Inventory Challenges96Modes of Transport97Examples of Central & Eastern European Growth100 IGD 2006www.igd.com/supplychain i 12. List of Tables4. Best Practice Supply Chain Management 107Supply Chain Performance Measurement Matrix109Standardisation and Simplification 110External Benchmarks111Root Cause of Success114Review and Share Performance Data114How do you improve performance?115Formal & Informal Methods of Performance Transfer117Winning Characteristics for the 'Leading' Retailer 121Winning Characteristics for the 'Leading' Manufacturers124Winning Characteristics for the 'Leading' Service Providers125Opportunities for Supply Chain Improvements127Focus of Top Supply Chain Initiatives127Winning Characteristics130 iiwww.igd.com/supplychain IGD 2006 13. List of Figures1. International Supply Chain Barometer13Key Elements in Supply Chain Management18Strategic Importance of Supply Chain 21Organisational Design23Balancing In-house and External Operations 28The Learning Programme Project Plan37Process Flow at Each Stage of Implementing NPI to Store422. Supply Chain Optimisation 45Pressures for Greater Supply Chain Efficiency46Global Data Synchornisation Vision 63What Makes up the Total Product Cost?66 3. International Differences and Emerging Markets 77Distribution Network in India944. Best Practice Supply Chain Management107ECR Scorecard Process 113Methods of Performance Transfer 116Enablers of Supply Chain Best Practice118Use of Continuous Improvement Techniques119Most Admired Retailer 121 IGD 2006www.igd.com/supplychainiii 14. iv www.igd.com/supplychain IGD 2006 15. Managing International Supply ChainsKey Findings and Executive Summary Key Findings and Executive SummaryKey Findings and Survey Results1. The top three international supply chain challenges have been identified as DemandPlanning & Forecasting, Retail Ready Packaging and New Product Introduction.2. The top five focus areas for international supply chain projects have been identifiedas: Demand Planning and Forecasting; Cost Management; Inventory Management;Customer Service; Production, Warehousing and Distribution.3. From a supply chain perspective, Tesco and Procter & Gamble were cited as the mostadmired companies in the industry.4. The emerging markets of China, India and Central & Eastern Europe continue to offerlow production costs but now offer significant international retail opportunities.5. Transferring best practice across geographies should be done in a simplified andstandardised way, and the key enablers are people and processes. But there aredifferences between organisations: from more formalised methods, such as globalmanagement roles, through to more informal methods of multi-discipline projectteams.6. 64% of surveyed companies say that supply chain performance is of high importanceto their company but many still think that their sphere of influence does not extendpast delivery to the retailer.7. Mirroring the trend for end-to-end supply chain solutions offered by third partylogistics providers, 60% of companies surveyed outsource their warehousingoperations, whilst 70% outsource their transportation.8. Factory gate collections and cross docking practices are becoming more widespreadacross international markets, as retailers explore the opportunity of reducing cost andimproving service levels.9. There is increasing demand for inter-modal services, but a level of harmonisation ininfrastructure across Europe is still required before the true benefits can be fullyrealised.10. The challenges of getting businesses to truly collaborate cannot be underestimated, but getting it right can yield significant benefits. Collaborative practices are fast becoming a pre-requisite to doing business.11. Where the supply chain is being seen as a key element in driving competitive advantage, organisational capability and business integration, companies are starting to take a holistic approach to organisational structures and integrate supply chain functions. IGD 2006www.igd.com/supplychain1 16. Key Findings and Executive Summary Managing International Supply Chains 12. Traditional methods of driving logistics efficiencies, such as tariff management, full- load deliveries and competitive tendering, now combine with cross-docking, consolidation, and leading-edge technologies to create a significant business improvement tool-kit. 2www.igd.com/supplychain IGD 2006 17. Managing International Supply Chains Key Findings and Executive Summary Executive SummaryInternational Supply Chain BarometerThrough primary research conducted in 2005, IGD has identified the current status and views of practitioners on international supply chains.Whilst the holistic view of supply chain involves both information and product moving from raw material right through to the end shopper, many companies still think that their sphere of influence stops with delivery to the retailer - whether at the distribution centre or at the store.The supply chain is now being seen as a key element in driving competitive advantage, organisational capability and business integration. With 64% of respondents viewing supply chain as being of high strategic importance.Strategic Importance of Supply Chain 10%High 26%MediumLow 64%Source: IGD Research, 2006 Where there is greater understanding of the inter-dependencies between logistics, sales and production, companies are starting to challenge more traditional organisational structures and integrate supply chain functions.Whilst functions such as Purchasing, Manufacturing and Distribution tended to be the most commonly-cited functions playing a key role in supply chain, the move to incorporate more traditionally customer-facing roles, such as Sales, Marketing and Customer Services is increasingly apparent.A large proportion of companies are now outsourcing their warehouse and distribution functions to third party logistics providers. Of respondents: 60% outsourced warehousing 70% outsourced transportation IGD 2006 www.igd.com/supplychain 3 18. Key Findings and Executive Summary Managing International Supply Chains Those companies who outsource elements of their supply chain were also aware of the complexities this may bring in managing a number of different logistics operators.To assist with this added potential complexity, logistics providers are looking to become 'lead logistics providers' with integrated technology solutions. Such integrated solutions may incorporate activities from labelling, packaging and 'in-store' replenishment initiatives through to global sourcing and international freight management. Such 'end- to-end' solutions assist retailers and manufacturers to improve their total supply chain visibility and achieve efficiencies through integration, streamlining and improved real- time data.As the supply chain responsibilities have been broadening, the respondents in the survey cited the top supply chain challenges facing their businesses:Key Supply Challenges Challenges Facing Supply ChainPercentage of Replies i.Demand Planning & Forecasting72% ii. Retail Packaging 54% iii.New Product Introductions54% iv. Fuel Costs 48% v.Availability 44% vi. Multi-Modal Distribution 24% vii.Labour Shortages or constraints22% viii. Shrinkage15% ix. Other 9%Source: IGD Research, 2006 On-shelf availability is a key area of focus within all of the top three cited challenges, impacting significantly on the likelihood of a shopper finding the product they want, at the time they want it and in the quantity they want to purchase. The biggest proportion of respondents identified the ability to accurately plan and forecast demand as their number one issue. This issue is particularly important in an international supply chain environment where there is increased uncertainty around lead times and reliability of service.Improving the levels of collaboration between trading partners will be an important step in meeting those challenges head-on, and delivering the right service levels, in the most efficient and cost-effective way. Supply Chain OptimisationA number of factors have been impacting on the supply chain, adding complexity and increasing pressure on costs, service, availability and the need to accurately plan and forecast demand. The chart highlights these pressures. 4 www.igd.com/supplychain IGD 2006 19. Managing International Supply ChainsKey Findings and Executive SummaryPressures for Greater Supply Chain EfficiencyMore Promotions Global Sourcing &CongestionLonger Lead-Times Costs Retail Service Levels Packaging Availability Price SensitivityDemandPlanning Skilled Labour Fuel CostsShortagesNew Product Introductions Source: IGD Research, 2006 Companies are responding through a variety of supply chain initiatives to help maintain total costs, service levels, availability and accurate demand planning.Traditional methods of driving logistics efficiencies, such as tariff management, full-load deliveries and competitive tendering, now combine with cross-docking, consolidation, and leading-edge technologies to create a significant business improvement tool-kit. Solutions are highlighted in the table below: Solution SetsThenNow Tariff Management Centralised Distribution Hubs Full Load deliveries Warehousing Sale & Lease-Back Safety Stocks Consolidation & Shared User Initiatives More Frequent Deliveries Vendor-Managed Inventory Routing efficiencies Cross-Docking & Factory-Gate collections Competitive Tendering Increased use of TechnologySource: IGD Research, 2006 Whilst some companies are moving into large-scale centralised distribution parks, that will sometimes service several countries from one single location, others are selling off their warehousing assets, and then leasing them back, thereby reducing capital commitments and injecting cash into the business.Warehouse automation continues to prove that technology can bring significant operational benefits for some companies. The following table highlights potential benefits and considerations when looking to introduce automation. IGD 2006www.igd.com/supplychain5 20. Key Findings and Executive SummaryManaging International Supply Chains Benefits of AutomationChallenges of AutomationWhat to Watch Lower long-term operating costs.High initial capital investment.Software specification and configuration - the best-designed solution will still fail to deliver the desired results if the software is poorly configured.The marginal cost of volume It can be difficult to adapt if Training - despite automation, people are still increases is much less than withsignificant business changes occur. employed in a whole variety of roles, and these manual systems. people need to understand the systems and processes in detail, and ideally to have used them before the facility 'goes-live'. Improved accuracy in picking andAutomation represents a long- Exception Management - systems must be loading.term commitment, from which it is designed to be able to manage the exceptions in a not easy to disengage.user's business model, no matter how small, because any level of manual intervention or reconfiguration is likely to increase costs.Improved productivity and speed There is a requirement for long- of response.term planning and vision, well in advance of implementation. Source: Exel, 2005/IGD Research, 2006 Other new technologies like RFID/EPC and the benefits of Global Data Synchronisation remain firmly on the industry agenda. However there are still a number of challenges that continue to limit widespread adoption, not least the ability to create a solid business case for the large scale investment.Transport costs account for a significant proportion of total supply chain costs, and these are being challenged across many international markets by fuel cost increases, legislative changes, road tolls and a lack of investment in transport infrastructure.Factory-gate collections and cross-docking practices are becoming more widespread, as retailers in particular understand the real benefits of increased inbound cost visibility, and the opportunities for integrating transport fleets.Inter-modal activity is on the increase across Europe in particular, as more and more companies look to move freight back onto the rail and canal networks. There is also a growing trend for short-distance sea-shipping. Logistics service providers want to capitalise on improvements in these linkages to offer full end-to-end supply chain solutions. International DifferencesIGD's international survey confirmed that companies encountered different supply chain challenges depending on the market in which they operate. These differences can be grouped under cultural; infrastructural & operational; internal & external business management issues; and legislative differences. The challenges and examples of these are shown in the following table:6 www.igd.com/supplychain IGD 2006 21. Managing International Supply ChainsKey Findings and Executive Summary International Differences in Supply Chain ChallengesTheme ChallengeExamples Cultural Different shopper preferences, particularly Germany prefers lean meatwith regards fresh produce Japan prefers meat with more fat Different language variants/customisation Indians prefer to shop in wet markets for freshproduce, rather than modern supermarkets Infrastructure & Lack of cold chains in some developing No public cold chain logistics supply in China Operationalmarkets South American ports Bottlenecks at ports Permit issues in Russia and former Soviet Export and goods movement permit controls Union states, India and China A lack of truly international logisticscompanies means that different contractualagreements have to be made for differentcountries Internal Demand volatility depending on brands life-cycle For retailers, international franchise operationsare generally managed differently fromwholly-owned stores Critical mass can be an issue in developingmarkets, leading to service level issues When exporting, the required quantities areoften fixed well in advance, compared to'home territory' orders which can be veryvolatile Availability issues in some developing marketscan be solved through using extra lower-costlabour, whereas in more developed marketsalternative solutions are required External Different approaches to bar-coding, In the UK and northern Europe there tends topackaging, case-sizes, shelf-ready packaging, be more centralised distribution and deliveryand pallet requirements into distribution centres, whereas in Italy, Different trade structures, with different levels Spain and southern Europe, there is aof market concentration, require differenttendency for more direct-to-store deliveriesoutbound logistics solutions and demand The UK focuses heavily on delivery within aplanningfixed hour delivery slot, whereas in France it Different performance managementcould be delivery on the day, but with heavypenalties if this is missed The UK is viewed as one of the most difficultmarkets to satisfy, due to short lead-times anddemand fluctuations Legislation Different legislative requirements for Switzerland - vis--vis the adoption of thepermissible ingredients in food productsEuropean Working Time Directive - Transport Different requirements for ingredientdeclarations and labelling Different legislation for driver hours Source: IGD Research, 2006 IGD 2006www.igd.com/supplychain7 22. Key Findings and Executive Summary Managing International Supply Chains The emerging markets of China, India and Central & Eastern Europe offer a plethora of opportunities for the food and grocery industry, in terms of global sourcing, cheaper production costs, and large populations with high, but relatively untapped consumer demand.With 12.9% retail growth in 2005 alone, IGD predicts that China will become the second largest food retail market in the world by 2020, with India also moving into a top five position. With widespread investment from the leading international food & grocery players, further supply chain development will certainly encourage this trend.Opportunities for Global Sourcing1. Lower wages 2. A large, flexible and well-educated work force 3. High local growth - New markets expand at a quicker rate than more developed markets(China +8% growth compared to the EU average of +2%). 4. The market for prime materials is already global, and countries have specialised over time sothat companies must act global to reach every production zone. For example whilst Chinahas focused on garments, hardware and electrical goods, Thailand has looked at food andplastic products, and India has focused on home textiles, shoes, garments and decoration.Thisglobal reach means that wooden furniture, for example, could have the wood imported fromBrazil, be crafted in Vietnam, but then sold into the EU. 5. Buying directly from the factory on an 'ex-works' basis could bring a margin bonus ofanything from 10-50%, and in times of consistent margin pressures, this is an attractive optionfor many companies. Source: Auchan 2005/IGD Research, 2006 Nevertheless, combining the size of these countries and the remoteness of some of their populations, with a number of legislative restrictions and infrastructural limitations, there are significant challenges for the speed of supply chain transformation. ChinaThe Chinese economy is booming, competition is on the increase, and retailers are notonly sourcing large quantities of product from the country, but are also openingincreasing numbers of stores, as the Chinese government continues to reducerestrictions on foreign direct investment. Opportunities in global sourcing include high local growth rates, driving furtherinvestment and stability, and a cheaper, flexible workforce, which can help improvemargins. A combination of organic growth and supply chain development will help retailersconsolidate their market positions, especially as international retailers hold only 3-4%share of the total grocery market. 8 www.igd.com/supplychain IGD 2006 23. Managing International Supply ChainsKey Findings and Executive Summary India India currently restricts foreign direct investment from multi-brand retailers, and so it is fair to say that there has not been the same level of investment in developing modern retailing practices and new transport links as has been the case in China.Leading manufacturers, however, are present in the Indian market, and via the distributor route to market, and with the use of field sales forces, are able to reach the most remote areas of the country and improve their brand awareness. Distribution Network in IndiaSub-WarehouseRetailer ManufacturerShopper Distributor WholesalerRetailerSource: IGD Research, 2006 Central & Eastern Europe Similarly to China and India, as a result of significant political change and the subsequent high levels of economic growth, the countries of Central & Eastern Europe have also become attractive places to invest, in terms of both manufacturing production and international retail expansion.The advantages of countries such as Poland, the Czech Republic and Hungary, are that they benefit from cost-effective labour and a culture of hard work, but without the long transit times for delivery. Best Practice Supply Chain ManagementTransferring best practice across departments, markets and geographies is a key method for driving international efficiencies and improving end-to-end capabilities, but this should be done in a simplified and standardised way.Key supply chain performance measures focus primarily on: availability, forecasting, service levels, order fulfilment, financial indicators, warehousing, transport, and inventory. Order fulfilment is the most common performance measure. The following matrix shows examples of supply chain performance indicators: IGD 2006www.igd.com/supplychain 9 24. Key Findings and Executive SummaryManaging International Supply Chains Supply Chain Performance Measurement MatrixAvailabilityForecasting Service Levels On-shelf availability (OSA) Forecast accuracy Customer service Items out-of-stock (OOS) MAPE (Forecast error) Supplier delivery performance Stock availability Conformance to manufacturing plan Service levels Supplier/Wholesaler availability by SKU forecast accuracySKU Sales forecast accuracy Order FulfilmentInventory Warehousing On-Time In-Full (OTIF) Inventory management Pick Accuracy OTIF (All costs) Stock-holding Pick Rates Case fill rate Stock turnover ratio/Forward weeks' Cost per case Order fill ratecover Handling costs per m3 Working capital (Inventory values) Cost per pallet General Financial Transport Other Supply chain costs as a % of net On-time deliveries, late deliveries & All components of the 'perfect order'sales delivery windows SKU complexity Lost Sales Drop-size Waste/Write-off Invoice accuracy % of direct delivery Non-quality costs First-time invoice acceptance Vehicle utilisation Lead-time achievement Low code sales Load efficiency Time/Speed to market Cost savings Distribution cost per case/m3 Information efficiency Cost per unit delivered Cost by kilometre Distribution build Cost vs. volume vs. turn-over Cost of production of best quality Profitability vs. cost product (which is different fordifferent regions) Source: IGD Research, 2006External benchmarking is gained primarily from the retail customer sharing informationon cross-supplier performance and is often based on order fulfilment and availability. Inaddition, there are a variety of other methods used by companies, including the ECRScorecard, industry bodies, and external consultancy firms.External BenchmarksCustomerIndustry Body/ExpertiseOther Customer OTIF External consultants x3 Nothing concrete - based Customer tables or service IGDin international experiencelevel reports, comparing ECR Scorecard Tenderingwith peers ELUPEG forum (inter- In-market distributors Retailer KPI's company comparisons) None Retailer availability data Case fill rate (shared byretailers)Source: IGD Research, 2006 10www.igd.com/supplychain IGD 2006 25. Managing International Supply ChainsKey Findings and Executive Summary Root cause analysis of good performance is most likely to be shared around a business via internal reporting methods and communication processes, including collaborative work between trading partners. Improved use of data, greater internal and external communication, and focus on inventory management and forecast accuracy are all key factors in improving overall performance.In terms of transferring best practice around the business, there are differences between organisations, from more formalised methods engraved in organisational structure, such as 'global' management roles, through to more informal methods via multi-discipline project teams. In this way, the key enablers for supply chain best practice are people and processes. Formal & Informal Methods of Performance TransferFormal Global Roles Some organisations have global roles, with accountability for developing, spreading and training best practice solutions. These can take the form of country visits, teleconferences, intranet utilisation and best-practice presentations.Some organisations argue that if the business is managed at an international regional level (e.g. Europe), then improvements become visible to all geographies.Reporting &Weekly or monthly reporting methods, and monthly Meetingssteering committee meetings, are used to share performance results and best practice solutions.Multi-Functional These can be a very effective way of driving cross- Project Teams functional understanding and communication, and are essential for many project design and implementation initiatives. Collaborative project teams with the retailer customer can also ensure that strategic goals are aligned.InformalWord-of-mouthWord-of-mouth - but with no specific PR exercises. Source: IGD Research, 2006 There are a number of standardised continuous improvement techniques used across the food & grocery sector, particularly amongst the supplier base. The production environment lends itself to process re-engineering techniques, total quality management initiatives and lean methodologies. Process management is the most common method employed by the international companies surveyed by IGD. IGD 2006 www.igd.com/supplychain 11 26. Key Findings and Executive Summary Managing International Supply Chains Use of Continuous Improvement Techniques 9% 20%41%Business Process Re-engineeringTotal Quality Management (TQM)Lean Methodologies20%Six SigmaTotal Productive Maintenance (TPM)Other24%24% Note - companies can choose more than one technique Source: IGD Research, 2006 Finally, IGD's supply chain survey asked companies to choose a best-in-class company - retailer, supplier and service provider. Amongst others, companies most admired by the Supply Chain Executives included Tesco and Procter & Gamble. The characteristics displayed by recognised leading retailers and manufacturers are highlighted in the tables below:Winning Characteristics for the 'Leading' Retailer 1. Growth (Sales & Profitability) 2. Strong customer focus 3. Integrated supply chain 4. Distinct business model 5. Strong collaborative relationships Source: IGD Research, 2006 Winning Characteristics for the 'Leading' Manufacturers 1. Innovative 2. Effective brand management 3. Speed-to-market 4. Excellent customer management 5. Scale and agility of supply chain Source: IGD Research, 2006 'Best-in-class' can represent something slightly different for a retailer (collaborative), a supplier (brand management) or a service provider (cost effective), but there are also some distinct similarities across the end-to-end supply chain for a winning business formula. The companies that came out on top of the IGD international supply chain poll all show elements of the following key characteristics in their business models: Winning Characteristics1. Strong customer focus2. Operational delivery3. InnovationSource: IGD Research, 200612 www.igd.com/supplychain IGD 2006 27. Managing International Supply Chains 1. International Supply Chain Barometer 1. International Supply Chain BarometerSummary A holistic view of supply chain involves both information and product moving from raw material right through to the end shopper. However, many companies still think that their sphere of influence stops with delivery to the retailer, whether at the distribution centre or at the store. Where there is greater understanding of the inter-dependencies between logistics, sales and production, companies are starting to challenge more traditional organisational structures and integrate supply chain functions. The supply chain is now being seen as a key element in driving competitive advantage, organisational capability and business integration. A large proportion of companies are now outsourcing their warehousing and distribution functions to third party logistics providers. These same companies are also aware of the complexities of managing a number of different logistics operators across markets. Logistics specialists are now offering 'end-to-end' international supply chains solutions to help retailers and manufacturers improve their total supply chain visibility and achieve efficiencies through integration, streamlining and improved real-time data. The top supply chain challenges for the food and grocery industry includes accurate demand planning & forecasting; retail packaging; and the management of new product introductions. On-shelf availability is a key area of focus, and all three of the above issues can impact significantly on the likelihood of a shopper finding the product they want, at the time they want it, and in the quantities they want to buy. Improving the levels of collaboration between trading partners will be an important step in meeting those challenges head-on, and delivering the right service levels, in the most efficient and cost-effective way. Cost and information management are key challenges for a number of the companies surveyed by IGD for this report. IGD 2006www.igd.com/supplychain13 28. 1. International Supply Chain Barometer Managing International Supply Chains1.1 IGDs International Survey Key Points to Note Collaborative logistics is seen as a key opportunity to find the right balancebetween an efficient cost save and time to market. 44 companies contributed to IGDs International Survey. A broad spectrum of businesses (UK and International) have a vested interest ininternational supply chains. Supply Chain Executives surveyed held a mix of country-specific responsibilities,through to Regional, European and Global management accountability. Against a backdrop of price deflation, shopper demand for more choice, and varyingcustomer loyalty, the market for consumer goods is now very much a globalphenomenon and continues to grow at an accelerated pace. In the last ten years, globaltrade of consumer goods has leapt from over 5% growth per year to double-digit growth,as the booming economies of India, Central Europe, and China have joined the moretraditional markets of America, Western Europe and Japan on the world trading stage. Examples of International Retail Expansion CarrefourSouth Korea is set for another 15 new hypermarkets over the next three years, with three new stores and re-furbishment of existing units planned for 2006.MetroCould open its first cash n' carry store in Pakistan in early 2007.This would be Metro's 31st country and its fifth Asian location alongside China, Japan, Vietnam and India. PyaterochkaThe Russian retailer has acquired another 25 stores, mostly in Moscow, and also plans to have 30 stores in the Ukraine by the summer of 2006. TescoSet to open 20 more stores in Malaysia within the next five years, adding to their existing ten stores through a joint-venture.Wal-Mart Reinforced its international presence in Brazil, through an acquisition of 140 stores, bringing their total to 295 and a number three market position.Source: IGD Research, 2006With an increasingly promotion-led marketplace and extended lead-times from globalsourcing, demand variability has increased, but reactivity and flexibility has reduced. Thewhole supply chain (retailer and supplier) demands less inventory, and yet on-shelfavailability continues to challenge the industry. 14 www.igd.com/supplychain IGD 2006 29. Managing International Supply Chains 1. International Supply Chain Barometer Companies are therefore looking for even greater supply chain efficiencies to support business sales and growth strategies through excellent customer service. Developing collaborative logistics is therefore now seen as a key opportunity to find the right balance between an efficient cost base and time to market.Consequently, the challenges of managing international supply chains have never been greater. IGD's new report aims to discuss just some of those challenges, provide a variety of case-studies and examples of innovative solutions. It will highlight supply chain complexity with key emerging markets, and share examples of best practice management across the international food & grocery industry. 1.1.1 IGD Research MethodologyIn order to supplement the extensive number of case-studies included in the Managing International Supply Chains report, IGD carried out an on-line survey of Senior Executives to provide both a quantitative and qualitative insight into how leading companies manage their supply chains internationally.This unique research, conducted in November 2005, explores the facts, beliefs and future predictions of Senior Managers who are responsible for driving international supply chain efficiencies.The following tables indicate the companies and a list of sample job titles that contributed to IGDs research for this section of the Managing International Supply Chains report. Companies Contributing to IGD's Survey ResearchACR Logistics Kraft International CommerceAJC International Inc.Kraft FoodsAllied Domecq Spirits and WineLion & DolphinARC Advisory GroupLiven SAArc International Logisys A/SArla Foods (UK) plc Lornamead Europe LtdBacardi-Brown-Forman Brands MasterfoodsCampbells Grocery ProductsMondi HypacCarrefour Czech RepublicMuller Dairy (UK) LtdColgate Palmolive (UK) LtdPIC (part of Sygen International)Cott Beverages LtdProctor & GambleDiligio Advisers AB Sara Lee InternationalElizabeth Shaw LtdSCAEverNew Int Inc.SC JohnsonExxonMobilSeegrid Corp.Freudenberg Household ProductsSSL InternationalGolden Wonder Ltd UnileverHabitat UK LtdUniversal Pictures InternationalHJ Heinz Frozen and Chilled Foods Ltd Universitat Autnoma de BarcelonaHP FoodsUniversity of ColoradoInformation Resources Weetabix LtdKPMGWD Irwin & Sons LtdSource: IGD Research, 2006 IGD 2006www.igd.com/supplychain 15 30. 1. International Supply Chain BarometerManaging International Supply ChainsSample Job Titles Responding to IGD's Research Director Outbound Logistics W. EuropeInternational Logistics ManagerEuropean Logistics DirectorInternational Retail Operations DirectorEuropean Sales Manager Logistics DirectorEuropean Supply Chain Director Manager Global Customer ServicesEuropean Supply Chain Project ManagerNordic Sales Director and Category DirectorHead of LogisticsSales and Marketing DirectorHead of Planning & Customer ServiceSales DirectorHead of Supply Chain Supply Chain Information ManagerHead of Warehousing and LogisticsSupply Chain ManagerInternational Business Account Manager VP Business DevelopmentInternational Commercial ManagerSource: IGD Research, 20061.1.2 What is Your Business? In order to understand the range and role of participating companies within the food andgrocery sector, IGD asked respondents to specify their type of business. The vast majority of respondents classified their company as a Fast-Moving Consumer Goods (FMCG) supplier with 65.2% of the total responses. The next largest group was Management Consultancy Firms at 10.9%. Retailer responses represented 8.7% of replies. The remainder was made up of logistics service providers, packaging companies and other specialist producers. It is perhaps not surprising that IGDs research into international supply chains gained themost responses from manufacturing companies. These organisations represent thelargest single group within the food and grocery sector. Global operations managementand international manufacturing have long been at the heart of their production anddistribution processes, and this continues to be a growing trend as companies placestrategic importance on driving global branding and scale efficiencies. In this way, it is often the suppliers who have the most experience in managing supplychains internationally and the challenges that different markets and cross-bordermovements can present. Although this contrasts with the relative few numbers ofretailers with significant international presence, through the variety of international case-studies in this report, and a share of voice in the survey, it is fair to say that leadingretailers are becoming increasingly adept at using their supply chains as a means ofcompetitive advantage, and are now often at the very forefront of driving innovation insupply chain management, from product sourcing right through to the shoppers in-store experience. Combined with participation across consultancy firms, logistics, and packagingcompanies, the wide response to the survey provides some interesting insight into bestpractices and thought leadership in this vital area of operation.16www.igd.com/supplychain IGD 2006 31. Managing International Supply Chains 1. International Supply Chain Barometer 1.1.3 Which Country Operation(s) Do You Represent?To ensure a truly international perspective on supply chain challenges within the industry, the survey asked respondents to highlight the geographic responsibilities of their role.The Supply Chain Executives surveyed held a mix of Country-specific responsibilities, through to Regional, European and even Global management accountability. Caribbean Ireland Czech Republic Middle & Far East Denmark Scandinavia Europe South America France Spain Germany UK Global USA Hungary Western Europe Indian Sub-continent IGD 2006 www.igd.com/supplychain17 32. 1. International Supply Chain BarometerManaging International Supply Chains1.2 The Supply Chain Overview Key Points to Note Many companies still think that their sphere of influence stops with delivery to theretail customer, whether at the distribution centre or at the store. There is a growing trend for Sales & Marketing functions to be integrated into thesupply chain structure. 64% of companies surveyed by IGD say that supply chain performance is of highstrategic importance to their company. Managing the international supply chain as part of a 'global operations' businessmodel is prevalent amongst many of the leading manufacturing companies. IGD asked survey participants to define the term supply chain from their companysperspective.This helps us to understand the role of logistics professionals within the foodand grocery sector, but also the structure of the leading companies. Specifically, IGD wasinterested in whether there is a holistic view, or a more compartmentalised view of therole of supply chain and how it interacts within organisations, and externally with tradingpartners.1.2.1 The Definition Is it the buy, make, move and sell' functions in the business?Key Elements in Supply Chain ManagementProductRaw materials ManufactureDistribution Retailer/Wholesaler Consumer/ShopperInformation Source: IGD Research, 2006 18 www.igd.com/supplychain IGD 2006 33. Managing International Supply Chains 1. International Supply Chain Barometer If we consider the above diagram which aims to re-group all of the main links and elements in the end-to-end supply chain, it is fair to say that no single company was able to mention all of the individual components explicitly. Either the focus was on product, with no mention of the importance of information, or the supply chain stopped either at the retailer (customer) warehouse, store or shelf.Even when most elements were mentioned, the end shopper who purchases the product was often excluded from the definition, so that shelf is now synonymous with shopper:Scale of DefinitionDefinition of 'supply chain' within each company "The flow of information and product between the various parties from raw materials supplier to customer (retailer) shelf"'Text-Book' "All activities dealing with information and physicalmerchandise flowfrom procurement and manufacturing to POS (point-of-sale)"Source: IGD Research, 2006 In this way, many companies now recognise the importance of on-shelf availability, the last 50 metres, and the need for an integrated end-to-end view of the role of supply chain: Scale of DefinitionDefinition of 'supply chain' within each company "From inbound factory flows through to on-shelf availability"'Raw material to shelf' "The ability to get the right product to the shelf at the right time at the most effective cost"Source: IGD Research, 2006 Nevertheless, for many companies, the role of their supply chain stops either at the retailers depot or store, so that the flow of product to the shelf and the shopper remains the primary role of the retailer: IGD 2006www.igd.com/supplychain 19 34. 1. International Supply Chain BarometerManaging International Supply ChainsScale of Definition Definition of 'supply chain' within eachcompany "The purchase and delivery of product fromsupplier to store"'Stops at store' "A fluid, reliable flow of merchandise goingto the stores" "Total supplyprocess -fromingredients/packaging procurement todelivery to customer depot"'Stops at warehouse' "End-to-end process from supply of rawmaterials to manufacturing plants todelivery of product to customerwarehouses" "Material ordering through demandforecast and distribution to retail"'Factory-focus' "Management of customerdemandmanagement of inventoryforecasts and production levels"Source: IGD Research, 2006Finally, it was interesting to note: The importance of equitable trading relationships: The efficient transfer of information and product to meet customer and supplier requirements. Organisations expect supply chain initiatives to have more equal consideration of the needs of both retailer and supplier. The focus of the trading relationship: Manufacturing through to shelf (executive level) and forecasting to shelf (focus level with customers).In this example, one of the key factors in the supplier-customer supply chain relationship is the link between the demand forecast and on-shelf availability. Overall, the role of supply chain seems to vary quite considerably from one organisationto the next, so that where some companies have accepted that their sphere of influencehas moved down the supply chain and into the store environment, others still have amore traditional view, where supply ends at the back-door.1.2.2 Which Functions or Departments are Part of Supply Chain? A holistic view of supply chain can be facilitated by the organisational structure of acompany. IGDs survey sought to understand the current linkages between internaldepartments, by asking which functions or departments were considered part of supplychain. 20www.igd.com/supplychain IGD 2006 35. Managing International Supply Chains1. International Supply Chain Barometer In response, Purchasing, Manufacturing and Distribution tended to be the most commonly-cited functions playing a key role in supply chain, highlighting the physical transformation and movement of product around a business. Sometimes more detail was provided, to include planning & forecasting, quality, order processing, or logistics & warehousing.However, it is equally true to say that those parts of the chain that have been traditionally considered as more customer-facing, such as Sales & Marketing and Customer Service, are increasingly being integrated into supply chain. Where in previous times there have been organisational divides between commercial and distribution roles, alignment between these sometimes distinct parts of the chain now appears to be widespread.Nevertheless, there is not complete alignment across all functions, and departments such as IT, Human Resources and Finance are still viewed very much as support functions to supply chain, and were mentioned infrequently by companies in the survey. 1.2.3 How Important is Supply chain in Your Companys Strategy?In a highly competitive and challenging business environment, supply chain can be viewed as a key weapon in driving competitive advantage. IGDs survey asked whether supply chain was of high, medium or low strategic importance. Strategic Importance of Supply Chain 10%High 26%MediumLow 64%Source: IGD Research, 2006 High ImportanceOver 64% of responses said that supply chain was considered as being of high importance in their company strategy. What this actually means in operational terms varies considerably however from company to company, and may even depend on how a particular individual interacts within the organisation.A selection of views is provided in the table below, where inventory management, a focus on improving on-shelf availability, and cross-departmental training are all key outward signs of supply chain being considered of high strategic importance. IGD 2006 www.igd.com/supplychain 21 36. 1. International Supply Chain BarometerManaging International Supply ChainsViews of companies with Supply Chains being of 'High' Strategic Importance "Fixing empty shelves is a priority and a multi-billion dollar opportunity" "I have recently run a series of Supply Chain awareness sessions with all staff. The key issuecurrently is creating efficient linkages with each of the functions" "Control of inventory at all stages is vital to cash flow, production efficiencies and customerservice" "Emphasis is on operational management of a business plan to ensure maximum possiblelevels of customer service" "Supply chain seen as a way to gain competitive edge"Source: IGD Research, 2006Medium Importance 26% of replies said supply chain was of medium strategic importance. It is interesting tonote here that the main differences between medium and high importance are theoperational practices and the links between parts of the chain. This means thatcompanies need to have visible signs of the importance of supply chain within thecompany for example, real end-to-end processes and cross-functionalinterdependencies - for it to be considered by employees as being of high strategicimportance.Views of companies with Supply Chains being of 'Medium' strategic importance "Not yet walking the talk" "Supply Chain as a function is beginning to get recognition within the business" "We have too big an emphasis on manufacturing competencies versus true supply chaincompetencies" "We see the supply chain as an area to achieve efficient implementation of our brand/trademarketing plans. If we can exploit the supply chain, then the consumer will have moresustained opportunity to purchase our product"Source: IGD Research, 2006Low Importance In contrast, the remaining 10% of replies believed supply chain was considered as beingof low strategic importance for their company. Whilst it is not surprising to learn that thisgroup included a number of the management consultancy firms, to whom supply chainactivities per se would be expected to be of low importance, it was somewhat moresurprising to find a number of leading manufacturers who also believed that supplychain was not considered of high importance in their company strategy. If there is not a holistic approach to supply chain management, and departments work insilos across warehousing and distribution, production operations, and sales, then it isindeed possible for production and sales to be viewed as the primary focus of themanufacturing company, and that the logistics element is viewed simply as supportingthat primary function. 22 www.igd.com/supplychain IGD 2006 37. Managing International Supply Chains1. International Supply Chain Barometer Where functional inter-dependencies are not explicitly included in organisational design, and with a growing trend towards the outsourcing of warehousing and distribution to third party operators the argument being that these activities are indeed non-core then there is some logic to the view that supply chain cannot subsequently be considered of high strategic importance. 1.2.4 How is Your Supply Chain Managed?Companies were asked to explain how their supply chains were managed, whether at a regional, national or international level, in order to understand both the level of internationalisation and the degree of supply chain integration. Organisational Design24%41% International Regional National35%Source: IGD Research, 2006 In response, the majority of companies said their supply chains were managed internationally, with 41% of respondents, followed by 35% managed at a regional level, and the smallest number managing their supply chains at a national level, at 24%. Nevertheless, within this overall view, there are variances, and often the reality is that the supply chain is managed as a mixture of all three options. IGD 2006 www.igd.com/supplychain23 38. 1. International Supply Chain Barometer Managing International Supply Chains Organisational Structure Type of Design CharacteristicsExample Organisation Global Operations Manufacturing will often be managed at a 'group' Companies showing elements of this typelevel, thus as part of 'global' operations. of management structure include: Global manufacturing sites feed multiple regionsand then countries, with shared SKUS, or products. Procter & Gamble International teams will manage the purchasing Colgate-Palmolivethrough to the production part of the supply chain, Bacardiwhilst the rest of the chain will be managed locally. SSL International The commercial aspects of supplier-retailer Unilever.relations will often operate at a more regionalinternational level, such as Europe, Asia Pacific,Americas, Rest of World (ROW).Regional Some organisations, especially in terms of factory Masterfoods Internationalproduction and commercial, structure themselvesat a regional international level, for example,Western Europe.National & Regional For some organisations, mature markets are Kraftmanaged at a national level, whilst developingmarkets are regional. All divisions report internationally, so that bestpractice can be shared across the internationalorganisation.National Some companies, despite being part of a large Arlainternational group, will still manage their supply Mller Dairychains autonomously at a country-level, Sara Lee Internationalparticularly for secondary deliveries into retailerpremises. The senior supply chain team will often report intothe international head-office, and will aim to drivecross-border efficiencies, where appropriate.Source: IGD Research, 2006 ImplicationsIGD believes that for many global international organisations, one of the many challenges in driving scale economies is how to implement cross-border synergies, and transfer best practice across different markets and operating companies. The management of supply chain best practice within surveyed companies is discussed later in this chapter.Source: IGD Research, 2006 24www.igd.com/supplychain IGD 2006 39. Managing International Supply Chains1. International Supply Chain BarometerCase-Study - Unilever, Managing International Supply Chains Unilever is a leading manufacturer of FMCG, with close to 300,000 employees, brandson sale in 150 countries, and strong positions in both developed and developingmarkets.Within the Home & Personal Care (HPC) division, Unilever products range fromfabric cleaners through to hair/skin care and deodorants, with brands such as Cif, Doveand Comfort. ContextAgainst an industry backdrop of tightening margins in a climate where fixed assetsand working capital are taking a larger proportion of sales, there have been 4 keydrivers for Unilever HPC to consider managing their supply chains on a global orregional basis, whilst being able to react to individual customer demands at a locallevel. Four Key Drivers Scale: in supply of materials, manufacturing and distribution. Speed: in delivery of innovation and responsiveness. Excellence: in their ability to leverage skills and expertise. Alignment with the rest of the Unilever business. Process I - Global Executive Supply Management (GESM) What?GESM has created a single point of contact for a material or group of materials. Thiscontact is empowered to negotiate on price, terms and conditions on behalf of allregions, categories and brands, thus securing materials supply on a global basis anddeveloping, maintaining and implementing supply strategies. Why?Unilever HPC has introduced a global supply management programme to leveragetheir scale with suppliers, avoid bidding against themselves, to develop deeperunderstanding and knowledge of the market, to enable global innovation andsimplification and to manage supply constraints more effectively. How?Through a defined management structure (made up of a global supply managementdirector, regional team members, and technology and administrative support teams),Unilever's GESM uses a combination of strategic and operating frameworks, formal andinformal networks, and processes and systems. The operating framework concentrateson clear roles and accountabilities, including the decision-making and contractualframeworks, and a code of business principles, whilst the process and systems includespeople and information management, and project and performance managementtechniques. IGD 2006www.igd.com/supplychain25 40. 1. International Supply Chain BarometerManaging International Supply Chains Results (between 2001 and 2004) - 85%of global spend was through the executive teams.- Globally-synergised spend- Global co-ordination in supply crisis.- Creation of supply market specialists.- Executive buying as an enabler of global innovation.- Large-scale, focused projects with fewer suppliers.- A consistent information structure.Process II - Strategy into Action in Manufacturing What? The 'Strategy into Action' initiative aims to deploy the global and regional manufacturing strategies through the organisation and down to the local shop-floor production environment. How? Through a number of critical success factors (CSF), Unilever HPC aims for regional and local accountability, which drives global capability. Unlocking global economies of excellence, speeds and scale in the supply chain, Unilever aims to deliver exceptional top and bottom line growth. Unilever HPC Critical Success Factors Innovation Customer Cash for GrowthCorporate OrganisationDelivery Service Socialand People ExcellenceResponsibility Design for Output Operational Environmental Global andmanufacturereliabilityefficiencies targets regional virtual Early Reduced lead- Capacity utilisation Employmentsites (GVS/RVS)equipmenttimes Line speedspolicies Skillsmanagement Late variant Manufacturingdevelopment Vertical ramp- additionssavingsprogrammesup (postponement) Waste reduction Source: Unilever HPC, 2005 Strategic Deployment The overall divisional strategy will be split down for both categories and regions, and then translated into a category and regional supply chain strategy. This can then be communicated through the Global and Regional Virtual Sites, who play a key role in deploying the strategy locally through a series of work plans and scorecards.Unilever Key Learnings 1. Everything flows from the original vision and strategy. 2. Although a challenging process, it is imperative to have clear common keyperformance indicators in all territories. 3. Invest time in the operating framework, ensuring clarity of roles andaccountabilities globally, regionally and locally. 4. Processes and information must be aligned to this framework. 5. It is important to invest in developing informal networks and relationships.Source: Unilever, Feb. 2005/IGD Research, 200626www.igd.com/supplychain IGD 2006 41. Managing International Supply Chains1. International Supply Chain BarometerCase Study - Zaras Vertical Supply ChainFormats No. of StoresZara816Kiddy's Class 143Pull&Bear 414Massimo Dutti 356Bershka 344Stradivarius254Oysho 139Zara Home 101 Source: Zara UK, 2006Zara Store, CasablancaBackgroundZara is a fast fashion retailer that has a highly responsive supply chain enabling it to getnew fashions onto the marketplace in a matter of weeks. It is part of a bigger group ofcompanies owned by Inditex. Inditex has over 2,500 stores across 400 cities in 58countries generating sales of 66bn. It operates eight independent formats of whichZara is the dominant format. During 2005, Inditex opened 323 stores and by 2009 aims to nearly double its totalnumber of stores to 5000.The most successful store opening in Zara's history was the 20,000 sq.ft. site located on Henry Street, Dublin. With no formal advertising, anticipation about the impending store opening spread quickly by word of mouth. Like most of Zara's store openings, all the directors arrived two days before the opening to unload the garments from the vehicles and merchandise the stock in store; encouraging feedback from junior staff on what works and what doesn't. Zara is driven by the introduction of new designs. A big selling item may well mean astore only receives ten of those items. The focus is on selling through, giving an air ofexclusivity about the Zara brand. In turn building up anticipation amongst thecustomer on the next exciting new design to come into store. Zaras model differs from conventional clothing retailers, it more closely emulates amake to order environment. It allows more stock to be made available during theseason it is sold (in season). This helps to retain higher exit margins with subsequent'markdowns' close to half the industry average (Source: Zara UK). Confirmed StockZara Industry Average6 month pre-season15-25% 45-60%Start of season 50-60%80-100%In season 40-50% 0-20%Source: Zara UK, 2006 IGD 2006www.igd.com/supplychain27 42. 1. International Supply Chain BarometerManaging International Supply Chains Vertical Supply Chain Zara operates a unique model in the fashion industry. Its vertically integrated business undertakes a variety of activities in-house from design, manufacture, sourcing, distribution to running retail operations. 'Zara even sources the marble for its shop floors from its own quarry'. Balancing In-house and External Operations Supply of Fabrics Manufacturing40%40%60%60% Inhouse (Zara) External (Outsourced)Source: Zara UKClearly, having a significant supply base in Spain is more expensive than sourcing from Asia - but the increased flexibility of producing to demand is an advantage. This is particularly true for fast fashion items where over 50% is produced in Spain and 26% from the rest of Europe. Asia is used more extensively to produce steady or permanent lines.All functions of the business continuously work together in teams able to produce new collections each season, which are updated and completed on a weekly basis, continuously renewing the fashion offer. Designers Attend international fashion events andStorescreate designs. Merchandise stock, sellModelists product and feedbackMake patterns andcomments and new sample garments. design ideas. CommercialBuyersMonitor sales patternsSource material and and adapt collections tonegotiate withthe tastes of eachDistribution suppliers. country. ExecutivesManage the availablestock with the orders required by stores. 28www.igd.com/supplychain IGD 2006 43. Managing International Supply Chains1. International Supply Chain BarometerThe continuous feeding of ideas is a key feature of this chain from store staff inputtingpotential design trends to manufacturing extending the length of a sleeve of aparticular garment to more fully reflect the average size of an individual in a country.As a new product is made available for sale, within 2 hours the manager's feedback thecustomer response and identify if it is a good or bad seller. Zara doesn't mark down its products because if the product is not selling they stopmanufacturing it. They do hold sales, but only within two distinct periods during theyear at the end of Winter and Summer. Stores order their own stock from an offer they receive twice weekly from thecommercial managers who then have to negotiate the stock for their respectivecountry of responsibility. Stores are ranked according to level of sales and forecastaccuracy and receive priority orders as a result. New product is made available to countries after successful trials and is not pushedonto the stores. Commercial managers pre-warn countries of upcoming styles. Just asnew styles are introduced, Commercial Managers decide the cut-off point when theproduct is considered unsuitable. This in turn helps to control the range density in-store. DistributionNearly all of Inditex stores receive deliveries centrally from Spain. These highlymechanised distribution centres are dedicated to the individual store formats:: Zara Logstica (A Corua) Plataforma Europa (Zaragoza) Tempe (Alicante) Pull and Bear (Narn, A Corua) Massimo Dutti, Bershka and Oysho (Tordera, Barcelona) Stradivarius (Cabrianes, Barcelona)Source: Zara UK, 2006The depot in A Corua is a cross docking facility where most of the stock is shippedonwards to Zara and not held for long periods on site.This is achieved by the 127km ofmoving rails that connects the DC to the manufacturing site on the opposite side of aroad (product moves on rails under the road). Apart from a small warehouse in Mexico,the A Corua warehouse sends out stock to all of Zara's stores twice a week. Typicallyorder lead time from factory to store is 1-2 days. IGD 2006www.igd.com/supplychain29 44. 1. International Supply Chain BarometerManaging International Supply ChainsMaterials DistributionSource: Zara UK, 2006All product deliveries are made from the central sites in Spain. For international deliveries the product is delivered to the border of the country, and the corresponding logistics provider for that country takes over the distribution to the store.In Summary Zara's vertically integrated supply chain supports its fast fashion business model. It helps to increase the speed to market, getting a new product into store in a matter of weeks compared to months for a typical competitor. With no advertising costs it relies on the strength of its offer and the anticipation amongst it customer base to create awareness and brand recognition. In an environment where discounting is commonplace, Zara maintains a higher percentage of full price sales.Controlling all aspects of the supply chain gives it the flexibility to customise the garment to meet the changing needs of its customers all over the world.Source: IGD Research, 2006 30www.igd.com/supplychain IGD 2006 45. Managing International Supply Chains 1. International Supply Chain Barometer 1.3 OutsourcingKey Points to Note Seamless supply chain flow is a challenge for many companies operating across different locations, departments, and countries. 60% of surveyed companies said that their warehousing activities were outsourced to a third party logistics provider, compared to 70% of companies who outsource their transport operations. When supply chain is viewed as a 'non-core' activity, the levels of outsourcing tend to increase, but few companies have a lead-logistics provider managing their end- to-end supply chain. In response to some of these complexities, some organisations are simplifying their logistics operations by harmonising contracts and reducing the number of operators used.1.3.1 Penetration of Outsourcing to Third Party Logistics ProvidersIn organisations where logistics is outsourced, the challenge for the supply chain teams is how to promote the seamless integration of product movement and supply chain management across locations, departments, and partner companies, whilst benefiting from the advantages of not having to manage all of the links in the chain directly themselves.To this end, many third-party logistics providers continue to broaden their service offering, and now aim to manage the whole end-to-end supply chain. The reasoning behind such initiatives is the ability to improve full supply chain visibility, thus driving efficiencies, and simplifying both reporting and event management for the customer.In response to this trend, IGD wanted to gauge the level degree of supply chain outsourcing that occurs across international markets. For both warehousing activities and transport movements, the survey asked respondents: Is the supply chain managed internally, or is it outsourced to a third-party logisticscompany? What volume of goods is managed in-house or via the third-party company? Do you employ a lead logistics provider - that is to say, a preferred logistics company,providing extensive services? IGD 2006 www.igd.com/supplychain31 46. 1. International Supply Chain Barometer Managing International Supply ChainsWarehousingIn terms of warehousing activities, 60% of responses showed that warehousing wasoutsourced to third party providers, compared to 40% managed internally by thecompany. Of those 60% of companies that outsource their warehousing, 89% ofresponses said that this represented 50% or more of their total volumes, whilst 30% saidthat this represented all of their warehousing volumes. These results show thatoutsourcing is indeed highly prevalent within the warehousing part of the supply chain,and that when warehouse management is outsourced, it often represents a significantpart of the companys total volume throughput. In contrast, there are still a large number of companies who still manage theirwarehousing internally (40% of replies). In addition to legacy practices, or a strategicdecision to control all parts of the chain, this trend could also be due to the fact thatwarehousing is often integrated into the production facility for many manufacturers, andso it would be difficult to separate the management of these two parts of the chain. ImplicationsAs companies review their supply chain operations, sometimes resulting in the rationalisation of production and storage activities.With rising cost pressures it is likely that an increasing number of companies will view warehousing as a 'non-core' activity, increasing the potential to outsource to a third party company. For suppliers, this may well mean locating centralised storage, pick and distribution facilities away from the main production plants. For some retailers, this will mean more warehousing activities are outsourced, as they focus on in-store execution and product sourcing initiatives. The level of integration of third-party logistics companies within the international supply chain is therefore expected to increase over time.Source: IGD Research, 2006 TransportIn contrast, the picture for transport activities is somewhat different. At nearly 70% ofreplies, more volume is outsourced and transported by third-party logistics companies,compared to only 30% of volumes being managed internally on companies' own-fleets.Of the 70% of companies that outsource their transport movements, over 56% said thatall of their volume was outsourced. These figures confirm the pivotal role of specialist logistics firms in moving inventorywithin the food and grocery sector. When transport is outsourced to a specialistcompany, the client delegates all management of the movement of goods. It is due to thistraditional view of the role of logistics firms that many of the sector's leading logisticscompanies are now focusing on broadening their service offering with a range of value-add activities and end-to-end management. 32www.igd.com/supplychain IGD 2006 47. Managing International Supply Chains 1. International Supply Chain Barometer Lead Logistics Providers Aiming to become 'lead logistics providers' with integrated technology solutions, the larger logistics firms are moving up the chain towards the store environment, with both labelling and packing, and 'in-store' replenishment initiatives. Back down the chain, these companies are aiming to reduce the complexity and challenges of global sourcing and international freight management.Expectations and demand for quality integrated logistics services are just as high in more developing markets, and because of the heightened challenges supply chain professionals and Third party logistics service providers will be even more focused on driving efficiencies, reducing costs, and designing and managing more fully-integrated supply chain solutions.Some of the leading players in outsourced logistics, such as Exel, have created organisational structures that are regionally-based, thus concentrating on large geographical areas and the inter-linkages.This strategy presents growth opportunities in being able to offer integrated solutions, and simplifying the management of the supply chain for their customers. Third party logistics service providers, therefore, aim to get even closer to their customers, ensuring they remain focused on customer requirements. Some are even considering the prospects of joint inventory ownership and gain-share arrangements to drive further efficiencies and build stronger business partnerships.For those companies in IGD's survey who do have a lead logistics provider, the responses have been split by supply chain management structure, in order to see if there is any correlation between the way the supply chain is managed (regionally, nationally or internationally) and the logistics company employed to manage the flow of goods throughout the supply chain. Lead Logistics Provider by Supply Chain Management Structure Regional ManagementNational Management International Management Baylis x 2 Stiller Osbourne Logistics Exel Suederelbe in Germanyin the UK DHL in the USA "Depends on the country CERT in the UK Global Servicesin which the company Celsius First in the UK x 2 DHLoperates" ND Logistics in Czech Maersk Frans Maas in Europe Republic x 2 Youngs Transport Exel Danzer Baylis in the UK A local co-operative of TNT in the UKentrepreneurs (Hungary) Bougheys in the UK ND Logistics in EuropeSource: IGD Research, 2006 IGD 2006 www.igd.com/supplychain 33 48. 1. International Supply Chain BarometerManaging International Supply ChainsOverall, despite over 40% of responses stating that the supply chain was managed at aninternational level, companies often do not have a lead logistics provider.This means thatorganisations currently outsource their international supply chains to a variety oflogistics operators. Whilst benefiting from local knowledge, flexibility, and sometimescheaper rates, the variety of contracts can also add complexity into the supply chain -which in itself can increase costs - and can also make inter-company comparison difficult. Points of difference: Mller Dairy, which manages its supply chain nationally, outsources all of their warehousing and transport logistics, but to a wholly-owned subsidiary of the Mller Group called Culina Logistics. For secondary deliveries, Arla Foods often delivers direct to store, and this is managed in-house. However, for deliveries that will go into retailer distribution centres (RDCs), the vast majority of these are managed ex-Factory Gate, and so the transport element is managed by the retailer, either by their own fleet, or by a sub- contractor.Source: IGD Research, 2006 ImplicationsIn an aim to drive scale efficiencies across markets through improved visibility of logistics costs, many international companies are now stream-lining their operations and choosing to reduce the number of divergent contracts and/or the number of logistics operators in the chain. A clearer view of costs and comparable key performance indicators will aide companies understand their real 'cost-to-serve', and for manufacturers, this can help in the development of service-based pricing initiatives. For example, if a retailer requires specific value-add services (like labelling), then there will be greater insight into the real costs that this service will create for the supplying company, thus helping to protect profitability.Source: IGD Research, 2006When a lead logistics provider is used, there is a concentration of companies being cited,which includes, perhaps unsurprisingly, the international logistics giants of DHL, Exel andMaersk. Through international integration and consolidation, DHL-Exel being a primeexample, these companies have been at the forefront of moves to offer end-to-endsolutions. IGD believes that this trend can only increase as both suppliers and retailerscontinue to internationalise their operations and seek global supply chain solutions. 34www.igd.com/supplychain IGD 2006 49. Managing International Supply Chains 1. International Supply Chain Barometer 1.4 Supply Chain ChallengesKey Points to Note Demand Planning & Forecasting, Retail Packaging, and New Product Introductionsare the top three supply chain challenges in IGD's international supply chainsurvey. Collaborative planning between manufacturers and retailers can bring solidbusiness improvements, particularly when considering the in-store availabilitychallenge. Retail Ready Packaging continues to be a hot industry topic, and 2006 will see thechallenges and benefits being further debated. Other key issues include understanding true cost-to-serve; increasing fuel costs;and the need for improved management information.In order to understand the challenges that international supply chains are facing, IGD's international survey asked companies to highlight: their main supply chain issues whether these differed by international market and also to share their main top three supply chain projectsWhether there are any supply chain issues that have truly global implications can be debated, but the companies surveyed found the below issues to be of particular relevance. 1.4.1 What Key Challenges are Facing Supply Chain in Your Area of Operation?Key Supply ChallengesChallenges Facing Supply ChainPercentage of Repliesi.Demand Planning & Forecasting 72%ii. Retail Packaging54%iii.New Product Introductions 54%iv. Fuel Costs48%v.Availability44%vi. Multi-Modal Distribution24%vii.Labour Shortages or constraints 22%viii. Shrinkage 15%ix. Other9% Source: IGD Research, 2006 IGD 2006www.igd.com/supplychain 35 50. 1. International Supply Chain BarometerManaging International Supply Chainsi. Demand Planning and Forecasting Clearly, the biggest supply chain challenge facing the international supply chain, with72% of replies, is demand planning and forecasting. With two thirds of respondentsbeing FMCG suppliers, the ability to accurately plan and forecast demand is the numberone issue for manufacturers within the food and grocery industry. Improvements in this area would help ensure production targets, service levels, andavailability targets are consistently met. Specifically, effective demand planning for shortshelf-life products in highly promotion-led categories proves particularly challenging,and with promotions being increasingly used as a key competitive tool, then successfulevent and promotional planning and forecasting can make a real difference to thesuccess of any initiative. Taking a more holistic view of the supply chain can facilitate improved planning andforecasting. This can come about though closer working relationships and a greaterunderstanding of the impact of one decision on other parts of the chain. Sales managers should know that over-forecasting brings additional stocks into the business, and hence increased storage, shrinkage and write-off costs for unusable items. Merchandisers should know that the over-ordering of products leads to greater volumes of sale discount or mark-downs. Whilst supplier managers should know that the over-production of one product can lead to higher stocks of what you do not want to sell, yet lower stocks of what you do want to sell. Amplification of changes in demand - termed the bull-whip effect - can have knock-oneffects in the supply chain. Whilst demand at the retailers till may be relatively constant,replenishment ordering in full truck-loads, minimum batch/order quantities, the mis-receipt of deliveries, additional ordering due to unreliable supply, and poor in-storeimplementation and compliance can all distort real shopper demand. This oftentranslates into huge peaks and troughs in demand placed further back into the supplychain. This demand fluctuation can create uncertainty in the chain, which can impact oncapacity and inventory levels. This pressure on space and handling efficienciessubsequently affects productivity and shrinkage. Perhaps even more importantly,incorrect demand forecasting and demand can adversely affect sales targets andprofitability.CollaborationIGD believes that integrated demand planning processes and tools will not only aid internal operations, but also when used collaboratively, can improve relationships between supply chain partners.In this way, the following case-study illustrates an end-to-end supply chain initiative, with particular focus on in-store implementation and product availability, and how through working together the supplier and retailer can unlock both sales growth and improved business relationships.36www.igd.com/supplychain IGD 2006 51. Managing International Supply Chains 1. International Supply Chain BarometerCase Study - Superquinn & Coca-Cola HBC (Ireland) Availability for Impulse - Collaborating to deliver 30% growth in category salesSuperquinn and Coca-Cola HBC were among six companies brought together by ECRIreland to work at improving on-shelf availability in the Republic of Ireland. IGD, withexperience of running similar programmes in the UK, organised and facilitated theend-to-end project. Retailer-Supplier pairings were pulled out of the hat and cross-functional teams wereput together from Logistics, Category Management, Store Management andCommercial. An ambitious pace of business improvement and personal developmentwas maintained through regular reporting back on progress, measures and results tothe other project teams, company sponsor directors and IGD facilitators.The Learning Programme Project Plan Web-based reference material On-Boarding meeting 01/02/05Measure and understand 1 Priority meeting 01/03/05Measure and understand 2 Progress meeting 30/03/05 Redesign and pilot Progress meeting 02/06/05Roll-out and sustain Evaluation meeting 27/07/05JanFeb MarApr May JunJul Source: IGD Research, 2006 Phase 1: Measure and Understand On-shelf availability (OSA) needs to be measured and analysed to avoid action ornon-action - being based on myth or gut-feel alone. The first set of data gathered bySuperquinn and Coca-Cola HBC showed good availability, but major opportunitiescame to light when more thorough analysis was undertaken. At first internal Not-Available-For-Sale audits completed three times a day, over a two-week period, and across four locations gave 98% OSA. At this point, there was a highlikelihood that Superquinn and Coca-Cola HBC could have walked away from theproject after this first analysis, if they had not had the prospect of having to report theirfindings to other project teams, sponsor directors and IGD facilitators. IGD 2006 www.igd.com/supplychain 37 52. 1. International Supply Chain Barometer Managing International Supply Chains Results from initial analysis Store EPOS sales by SKU by day were then tracked for two weeks using lost sales analysis.Whilst this revealed a Take Home OSA of 94% and a Multi-packs OSA of 94%, Impulse lines and New Items recorded an OSA of only 80% and 71% respectively! Independent audits across thirteen stores and the top twenty Impulse SKUs gave an even lower Impulse OSA of 77%.The project team at Superquinn and Coca-Cola decided to focus on Impulse because of the very high level of lost sales and their high margin. Project Definitions The team defined Impulse as chilled immediate consumption beverages across carbonated soft drink, juice, water, energy and sports. The definition of OSA included all placements for each key consumer occasion: Main Shop, On the Go and With Food.Further analysis revealed inconsistencies in the number of SKUs listed per store (e.g. ranging from 8 to 49) with some stores not stocking any of the top ten lines due to space allocation and lack of planogram compliance. Superquinn had given the category lower than averag
