The drive towards sustainable logistics Retailers are facing intense price competition today, both from within the industry, from brick-and-mortar competitors, as well as from the burgeoning online retail sector. In addition, customers are demanding that companies become ‘greener’ and engage in a sustainability drive. As a result, businesses are seeking to reduce logistics costs while maintaining or improving service, delivering not only improved financial sustainability but better environmental outcomes as well. Whilst important productivity and efficiency improvements can often be effected ‘within the four walls’, i.e. within retail stores and warehouses, optimisation of the overall design of the distribution network is where significant cost savings can be achieved. And of course a side effect of reduced costs is often accompanied by a reduction in environmental impact. The four prongs of distribution network optimisation Distribution networks often evolve over time to develop into a cumbersome beast. Their composition becomes determined, rather than by need and efficiency, by historical issues such as existing real estate, transport fleet and loyalties, and supplier arrangements.When the time comes, however, to conduct a blank-sheet overview of an organisation’s whole-of-supply chain needs and requirements, the following four aspects stand out as the critical elements in developing an optimised, sustainable distribution network: 1. Responsiveness. A more responsive distribution network will ensure that inventory is held at the appropriate point in the supply chain. This can dramatically reduce corrective transfer of inventory between the hubs in the network. 2. Centralised distribution. Converting direct-to-store delivery models to a more centralised distribution model, using a retailer’s own distribution centre, reduces the number of deliveries into store. This in turn allows store staff to focus on the customer, and it also reduces the number of half-empty trucks on the road and facilitates efficient use of vehicles, thereby reducing fuel consumption, congestion and pollution. 3. Primary freight. For large grocery retailers, taking control of inbound transport can greatly increase the utilisation of inbound vehicles. By operating a primary freight model, retailers can save money and greatly reduce the number of trucks arriving at their distribution centres. 4. Route modelling. Better route modelling leads to fewer kilometres travelled for the same task, which in turn reduces fuel usage and the number of trucks on the road. Optimised route modelling also improves vehicle utilisation, further cutting the number of trucks required. Let’s examine each of these in turn. 1. Creating a responsive distribution network Organic company growth, mergers and takeovers can lead to the development of complex, unwieldly distribution networks that require the management of often overlapping delivery routes, duplicate warehouses and inefficient processes. Retaining old silos and delivery processes risks escalating costs by having to continuously transfer products from DC to DC or, worse, from retail store to retail store, as well as potentially losing out on sales owing to lack of product in the required location. Staff and transport costs go up, customer loyalty decreases, and profitability goes down. As an organisation starts losing sales, customers and profits due to an underperforming distribution network, all signs point to an unsustainable supply chain – both in the economic and environmental senses. Not only does revenue decrease, but transport costs and emissions go through the roof, and the company’s reputation suffers in every respect. When management becomes aware of such a state, conducting a situation analysis for the business is the first step, identifying core drivers of OPEX, CAPEX, service and safety. With the information from such an investigation at hand, potential network designs can be developed, comparing such determinants as the location and size of warehouses / distribution centres, product range stored at each location, and materials handling and automation options within and sophisticated transport networks without. A thorough quantitative analysis follows, during which the optimal network design is determined, based on detailed quantitative and qualitative modelling. From there, a recommendation is prepared with supporting implementation plans. A good example of this has been the network strategy for Coca-Cola in Japan, which reduced the company’s operating costs by 12%. Xact Solutions designed a strategy that consolidated many DC sites into fewer, fit-for-purpose ones, lowering fixed costs as well as creating a critical mass to support the introduction of state-of-the-art automation and robotics. The strategy took advantage of available land at owned plant sites for the purpose of building fully automated mega-DCs. This enabled the inventory model to transition from a three-echelon model to two echelons, rationalising transport lanes and reducing distance travelled, transitioning service nodes downstream from stocked locations to cross-docking sites and improving the use of expensive industrial property in Japan. 2. Centralised distribution On the face of it, direct-to-store deliveries (DSD) are an attractive proposition. Theoretically, the retailer needs not worry about running a warehouse, much less a fleet of trucks. Simply places the order with the supplier, gives the destination and required delivery date, and the products shall magically arrive at each store, on time, in full, ready to be placed on the shelves. Once the retailer grows beyond a certain size, however, the reality can be quite a lot different from this idyllic picture. Firstly, suppliers may have different priorities to the retailer, and may decide to give preferential scheduling to other customers. Secondly, there will be as many trucks arriving at the retail outlet as there are suppliers, requiring unloading and checking the quality and quantity of the goods, as well as signing all the paperwork. Owing to scheduling errors, traffic and delays at previous drop-off points, as well as limited dock space at retail stores, congestion and missed deliveries are likely. All this puts significant pressure and demands on store staff, whose time would be more profitably engaged in serving customers. Against this picture, centralising supplies in the retailer’s own distribution centre allows dedicated and experienced warehouse staff to deal with incoming goods. Outgoing products can be picked, packed and consolidated into store-level pallet loads or even trolleys, and arranged on the truck in routing order. At the truck’s arrival at the retail store, the goods can be unloaded by a single person for immediate or delayed shelf replenishment, and staff potentially need only deal with one vehicle each day. No queuing with the associated pollution, and the retailer is able to enforce vehicle safety standards. Retail store staff can focus on serving customers and increasing sales, and staff numbers may be reduced at store level, more than making up for the numbers required in the warehouse. A larger part of the retail store’s real estate can be devoted to selling activities rather than goods receival, further increasing potential revenue. Centralised distribution also allows the retailer to keep safety stock on hand if this is deemed necessary. While this method is not suitable for fresh and perishable products and sale-or-return type merchandise (e.g. bread, magazines), the benefits when it comes to general merchandise are very significant. Woolworths, for example, reduced its DSD proportion to just 7.5%, and, owing to the scale of its operation, was able to secure a 1/3 cut in its freight expenses. With the additional benefits of better safety standards and lower pollution, the exercise was clearly a great contributor to Woolworths’s drive for a sustainable supply chain. 3. Primary freight Taking the concept of centralised distribution a step further is the primary freight model, where the retailer takes control of the inbound delivery from the supplier. While more often than not employing a third-party provider, pick-up/delivery scheduling and routing are firmly retained by the retailer. This way, the retailer only needs to deal with one transport provider (often the same firm as the one doing the DC-to-store deliveries), and keeping planning, control and communications in-house allows more refined, more precise organisation of labour and other resources. For example, in 2004 Woolworths decided to develop a transport business, Woolworths Primary Freight, as part of its major supply chain transformation program known as ‘Mercury’. This new business offered inbound transport services to its suppliers. Most of the actual transport capability is provided by third-party logistics providers, but Woolworths maintains firm control over the planning of the deliveries, facilitating a major improvement in efficiency compared with each supplier organising its own transport. On a weekly basis this means there are thousands fewer trucks arriving at Woolworths distribution centres and supermarkets, saving transport costs as well as receiving labour, and reducing waiting times. Efficiency was further improved by using some store delivery fleet vehicles to pick up from suppliers. All this allows Woolworths to charge a very competitive freight cost to its suppliers, whilst also making a profit that helps subsidise its overall supply chain cost. The improved planning of inbound transport was a crucial component in the success of the Mercury project. 4. Route modelling and optimisation Pick-up/delivery truck route modelling and optimisation round out the sustainable supply chain picture. The speed and reliability of delivering goods into store is of paramount importance. Lost sales not only affect the retailer’s profitability, but its reputation with customers as well. However, city stores require more regular deliveries due to increasing consumption and small floor spaces, and less available storage. Traffic congestion and tight docks also put pressure on inner city deliveries. Trying to get stock into shops in the city presents the classic list of last-mile challenges: parking restrictions, unloading difficulties, queues at loading docks – all these factors point to small vehicle requirements. Running small vehicles, however, increases the number of trucks required, together with more drivers, more fuel and pollution, as well as additional servicing costs. Balancing the requirement for quick and reliable deliveries with the need to keep the number of vehicles to the minimum is the job for the route modelling and optimisation software. Properly set up and configured, the day’s deliveries can be downloaded and the software will not only allocate the deliveries to various vehicles, but will also assist the driver in loading orders in the appropriate sequence. Then it maps out the optimum route to take, with real-time updates if changes are necessary enroute. The benefits are numerous, both in cost and environmental: Full utilisation minimises vehicle requirement. Minimises empty kilometres. Minimises total kilometres. Reduces carbon emissions and carbon footprint. Look into the future With the incredible pace and variety of technological developments in the transport industry, there are many facets of freight delivery that must be considered, some now and many more into the future. One of the most exciting developments in recent years and already in use by a number of advanced companies is the Virtual Control Tower, which gives a visual overview of the supply chain. Resembling a scene reminiscent of the NASA control rooms made famous by the various Apollo films, the Virtual Control Tower allows a visualisation of what’s happening in the logistics network that helps users make better decisions to avoid waste, to avoid unnecessary costs, and to improve service. A broken down vehicle might light up in red, and a customer requiring attention, a missed delivery, a truck taking an unauthorised detour, and all other noteworthy events, are similarly highlighted so that operators can take immediate action. These control towers have built up a lot of interest in the transport and distribution industry, and Xact Solutions has built control towers for some of our major clients. The subject is indeed worthy of an article to itself. Other future technologies to keep an eye on are robotic picking, automated vehicles, drone deliveries in terms of vehicles, and on a larger scale, inventions that attempt to revolutionise the whole of the distribution network, such as Amazon’s Flying Warehouse, massive flying blimp warehouses equipped with fleets of drones that deliver goods to key locations. The patent includes the concept of predictive deliveries, already in use by Amazon, whereby products are positioned in areas where the company’s predictive intelligence forecasts sufficient future needs. Eric WillemseDirector at XAct Solutions Eric Willemse is responsible for the Sydney office and also for company-wide resource planning and the warehouse solutions function. He is a logistics executive with extensive experience in all areas of the end-to-end supply chain from strategy development through transportation management, national distribution centre management, industrial relations, change project management, business development and turn-around with a strong commercial focus. He has over 20 years experience in a variety of senior management roles in both Europe and Australia for P&O, Unilever, Woolworths and CocaCola Amatil. In Woolworths he ran all of transport and distribution for the Supermarkets Division and was also responsible for developing Woolworths’ successful Primary Freight business. Within XAct Solutions Eric has overseen projects for clients in retail, fast moving consumer goods, building materials and airports both in Australia and the region. Eric has a Masters’ Degree in Transport & Logistics Management from the University of Tilburg in The Netherlands. Eric is passionate about identifying the big issues in your business that need to be addressed for long-term success and implementing change quickly. Eric develops a structured and focused approach in executing the major change required in strategy, operating models, organizational structure, target setting and reward systems, building strong teams with a cross-functional focus.