Fulfilment Factories and Modern Retail Methods - Article Example

AN EVALUATION OF FULFILMENT FACTORIES THE EVOLUTION OF MODERN RETAIL METHODS Table of Contents Page 1 Abstract 3 2 Introduction 4 3 Fulfilment Factories 5 4 The Retail Industry 7 5 Lean Concepts 9 6 Application of Lean in Retail 12 7 Case Study 1 – Sainsbury 13 8 Case Study 2 – Tesco 17 9 Conclusion 20 10 Bibliography 22 1 Abstract The retail trade is booming on consumer support and expanding due to economic expansion. Increasing number of households with larger incomes are fuelling retail sales in both food and non-food sectors. The advent of internet has expanded the retail sector to virtual shops and a new consumer who likes to shop around the clock and from the comfort of his home has emerged. Increasing sales demand increased support activities and deliveries that are met within time. This aspect has been discussed and two case studies of retail chains were examined to see how they handle this issue. It was found that technology played a vital role in the execution of deliveries and that the concept of Fulfilment Factories fit in very well with retail trade. On evaluation of the FFs it has been concluded that high achievement in retail is possible only with the help of efficient Fulfilment Factories. 2 Introduction Selling to the final consumer is what marketing is all about. Back until early eighties, before the advent of Internet, Mom & Pop stores were the ideal places for daily shopping and large retailers were few and far between, to be visited at leisure when time was at hand. Globalization, outsourcing and increasing number of retail outlets started to change the scene. Mom & Pop stores still exist but are more a novelty than necessity. The big retailers cater to every need from under one roof. They have spread their reach and are available in your neighbourhood. With the introduction of broadband a new kind of retailer or the e-Tailer was born. Mostly it was the same retailer you patronized who offered his services for home-delivery via the World Wide Web. These events changed the whole supply chain cycle. Earlier there was a supplier who catered to many stores who in turn catered to many more customers. Movement was slow, people were content, availability was slow and delay in some items was inevitable and accepted. Order flow was cumbersome, and involved a lot of guesswork. Inventories were either high or short and customers grumbled but kept on patronising. Manufacturing was forecast based and the forecast itself was based more on assumptions and customer satisfaction was at low ebb. Customer was king but reluctantly so. In the late eighties and nineties it dawned on retailers that to expand their business they needed Information Technology (IT) and the era of Enterprise software and Supply Chain Management was ushered in. IT had already taken manufacturing under its wings earlier and the retailers read benefits in it for themselves too. IT companies also came forward to understand their new clients’ needs and put forward many kinds of solutions. All were however based on supply chain management and the flow of orders and streamlining supply was the objective. A great improvement took place on the supply side and shelves were now found to be stocked with inventory and warehouses were overflowing with inventory. This led to other kinds of problems. Higher inventory meant that the customer could finally be serviced and the retailer got loyal customers coming back for more supplies, but the downside was that the working capital requirements increased manifolds due to high inventories and their management became a sore point. Wastages ran high due to mismanagements and financial burdens hit the bottom line. Demand patterns also kept changing and new products flooding the market made inventory a headache. The customer got wiser and switched loyalty easily. IT came to the rescue of the retailer again. Supply chain was tweaked further and the lean concepts of Just-in-time (JIT) that were in the production domain for a long time became standard practice in the retail scene as well. Now the inventory was planned on the JIT concepts and logistic planning became the mantra of the day. 3 Fulfilment Factories Warehousing is as old as retail itself. There was always need for a store to keep extra goods which could be brought to counters and shelves as and when required at short notice. No retailer, big or small, can be complete without having a warehouse as the retail space is always far costlier than the warehouse space. The retail space was always meant for display of items and a certain ambience is required to let the customer move about freely making choices during his shopping exercise. In contrast warehousing was unglamorous cramped space filled with all kinds of goods waiting to be shifted to counters and shelves. With enlargement of retail into different section of food and non-food items, accessories and other household goods, the retail space became more scarce and valuable. It was more profitable to use every inch of available space for display and customer movement than to store goods. Warehousing became more important and was developed on lines that could supply replenishments at very short notice. This meant planning and organizing the arrival and dispatch of goods that were required eventually in the stores. This further required planning of purchases which were based on demand. With addition of hundreds of items in a modern retail outlet the complexity rose to a degree that warehousing became a specialised department that was vital for the survival of the system. IT support and an infrastructure was necessary to plan these movements and logistics became the focal point. The entire concept of warehousing changed and it became a Special Business Unit (SBU) and a profit centre by itself. Separate companies came up with the objective of setting up business of warehousing as a standalone activity. In larger retail chains they created independent divisions to form new and advanced warehousing facilities with logistics and having its own separate specialist and trained staff. The warehouse of yesterday now became a modern Fulfilment Factory (FF). From a small and humble store it evolved into a large and sprawling complex. This is how the Fulfilment Factory concept was developed and given shape. These are large warehouses that act as buffer between the suppliers and the retail outlets. They hold the inventory and manage the inflow of orders with outflow of deliveries in all directions. These FF could be owned by the retailers themselves or indeed could be independent companies serving more than one retailer. Their smooth functioning depends largely on the IT infrastructure of both hardware and software. These concepts were borrowed from Lean Manufacturing and woven into seamlessly with retail. There was yet another reason for establishing the FF. On-line sales through website are on the increase. They are being catered to by brick and mortar companies like Tesco, Wal-Mart in retail as well as car companies like General Motors. The all sell to their customers who like to walk into the virtual stores on the web, view the products, select and pay for it on line. There are others who are purely web based retailers like Amazon and e-Bay. They own no store and the only display is on their extensive website. This offers the customers a unique now format where he or she can shop anytime and from anywhere for a whole variety of consumer products. This has literally extended retailing to their homes. In this kind of set-up the only fall-back is the FF that can then service the customer. Huge FFs have come up at strategic points to cater to this new segment of customer. This phenomenon requires great logistic support and advanced technological backup, and both independent and in-house FFs are catering to fulfil this need. 4 The Retail Industry Retail has undergone a radical change in the last two decades. There were already retails chains that worked nationally and the forerunner was Sainsbury which was almost a century and a half old. Now there are several large retail chains across the UK. Tesco is by far the biggest with over 32% market share followed by ASDA (part of Wal-Mart group now) with 16.5%, Sainsbury a close 3rd with 16.3% and Mark and Spencer 11%. Rest is shared between a host of others with less significant presence. Food used to be the main item they all sell but Apparels and fashion are attracting better numbers. Food has now evolved into organic, normal, fast-food, Vegetarian and non-vegetarian food, genetically modified (GM) food and a lot more varieties. It has also moved from being local into international food and customers are now demanding exotic foods and pre-cooked food from all kinds of places. The culinary tastes are changing which means that a whole new variety of spices from all kinds of places on the globe have to be brought in to satisfy varying taste buds. Then there are fresh and dried fruits and nuts dairy products and processed foods like cheese and preserved foods like jams. To procure, store and distribute all these is indeed a nightmare and impossible without extensive aid from IT. It is a similar story with apparels. Customers want from daily wear to formal wear in all segments of gents, ladies and children garments. Even infants and new-borns have exclusive sections of their own now and each with its accessories and add-ons. Labels have become a rage and foreign labels and famous names are common everywhere and in great demand. Over the years retail in UK, and indeed in the world, has seen great changes brought about by sustained economic growth and development. In UK the wages have increased by over 47%during the last five years. It is envisaged that there will be a wage increment to the tune of 4.6% continuous annual growth rate(CAGR) in the coming four years. This explosion in incomes has increased the purchasing power of the people and led the growth of retail business to great heights. The customer is now willing to spend more on larger variety of goods and this has had the biggest impact on the retailing of both food and non-food items.   Yet another factor is the increase in car and bike sales. This has brought the supermarkets within easy reach of consumers on a national scale. Increased sale of hoses has meant number of households has increased and this too has increased footfalls at the retail chains. According to RNCOS, a market research group, the growth of households is an important factor in the growth of the UK retail market. The past five years have seen a rise in household numbers by 4.2% and in the next four years it is expected ro rise at the rate of 1.8% (CAGR). (RNCOS Report) In the current year retail sales have increased on year on year basis by 3.5%. The average weekly value of retail sale in August 2007 was £ 4.9 billion or 3.8% higher than in August 2006. Sales of non-food stores increased by 4.2 per cent over the year, compared with 3.6 per cent for food stores and 1.8 per cent for non-store retailing, the smallest increase in this sector as compared to July 2006 (0.8 per cent). 5 Lean Concept There are many variations of the Lean concept that have evolved over a long period of time. Back in the sixties Toyota was the pioneer in introducing this concept for streamlining its own supply chain of component and part suppliers and introduced this to reduce inventory levels to a pull based system where the required item was pulled into production only when needed. This made the assembly line function more smoothly and productivity soared. Of course there was no IT then and the concept of Kanban ensured pull based availability of components. JIT further evolved for manufacturing and many variations came about and finally lean technologies have come to stay in manufacturing all over the world for controlling inventory, improving quality and reducing costs. The table below describes the basics of inventory management in different situations and it can be seen that with heavy infusion of IT the advantages of Pull based system can reduce inventory levels. EVOLOUTION/TIME PUSH ------------------------------------------------------------------------------------------- PULL Warehousing Production Flow & Coordination Direct Shipment Made To Order Description Supply Based On Forecasts And Held In Distribution Centres Until Required Inventory Received From Multiple Sources And Consolidated In Outbound Lanes Stage And Ship Directly From Factory Order Submitted, Manufactured And Shipped Directly To Customer Inventory Level High Medium Low Nil Asset Intensity High High Medium Low IT Intensity Low Medium High High Examples General Motors Amazon.com Bose Dell (Shlesinger. Joseph,. et al 2001) E-Tailing or selling goods through website are becoming an important part of retailing today. This can eliminate inventory altogether and here is the modern FF concept that comes into play. The benefit of web-based technology is that it assists suppliers to reduce inventory and become efficient. When there is sharing of information between the retailer and supplier, the latter schedule production more effectively. Similarly suppliers inform retailers of the schedules in advance reducing the inventory levels of the retailer. Sharing of information allows the company to raise its service levels as it is no longer concerned about supply side problems and the effective IT support offers it scope to redesign its supply chain system and focus more on the demand side. Suppliers now Push products in response to customer’s orders. There is real-time interaction between the supplier, the retailer, and the customer giving and seeking accurate information about what customers want. A good example of this is Dell who now is able to meet the customer’s specifications. This changeover from Customer Push to Customer Pull enables them to ship out products to the customer on the same day. It is a difficult performance, but when achieved it offers tremendous value to the customer and earns his loyalty for repeat orders. Of course this applies to consumer items and is suited to the food, apparel, and fashion goods that the retailers offer today. Most people accept ready made stuff rather than customized items and in this case the Pull system fetches the required item for delivery with relative speed as is the case in fast foods and grocery items. These items are low-cost low depreciation items. The frequently ordered items therefore will carry a larger inventory and will get serviced more quickly. The customized items are high cost and high specification items and will not be in inventory and will be supplied with some time-gap. Such items will be computers, bicycles, or cars. As will be seen the concentration of IT will be high-end and heavy in customized products that are made to order and will be low-end and less costly in case of ready made stuff. 6 Application of Lean in Retail Time is a great constraint today and the customer is always in a great hurry. This is where the lean consumption can change the equation as the customer can actually obtain the item cost-effectively from alternate sources without compromising on time and price. The 4 P’s, Product, Price, Place and Promotion all are rolled in to a push based lean consumption approach; the supplier who is the lean provider looks at customer circumstances instead of consumer power and caters to his needs. Time therefore becomes more important as it is the biggest weakness of the consumer today. Order fulfilment needs tracking technology and logistics plays a vital role. It may be better at times to let a specialist handle this and outsourcing can be beneficial as well as cost-effective. Large players like Wal-Mart and Tesco started off by outsourcing this activity to FF and only when they were confident that they started their own centres. It must be understood clearly that fulfilment is a core competency by itself. Fulfilment companies have to have internal capabilities to handle both inward and outward logistics and have to invest heavily into infrastructure backed by intensive IT support to be able to deliver round the clock on time. Speed is the critical factor here. Wal-Mart’s choice was to outsource so that it could understand the demand pattern. Indeed it paid premium prices to do so but ventured into fulfilment only after having gained the experience in on-line retailing. Now it is better positioned with in-house warehousing capabilities. Demand is always hard to predict. Tesco hesitated to build warehousing facilities and depended on existing fulfilment factories as it had to understand the demand pattern for its on-line customers. Other UK based retailers have also followed suit and have built capacities only after reaching a desirable level of demand before embarking on having their own FF. 7 Case Study 1 – Sainsbury By mid 1990 Tesco had already overtaken Sainsbury as the top retail chain in UK. Sainsbury also faced competition from ASDA which was at the second spot and was soon to be acquired by Wal-Mart and would be having more clout. But it still had 11 million customers 2,000 suppliers, 35,000 product SKUs, and 800 million cases of product each year. It could re-build itself on these factors. The customers were looking at enhanced product choice at lower prices and higher quality. Suppliers were looking for better demand forecasts and more predictable order flow and the margins were already on the verge of being non-existent. The reason for this malaise was not far to see. The supply chain was badly outdated and the infrastructure was in tatters. Inventory visibility was uncertain and there was little real time data for making decisions. The company was using a 30 year old mainframe based warehouse management system. IT was at low ebb and bulk of the software was developed in-house and as many as 400 different supply chain softwares application were being used. Its Distribution Centre was an antiquity and the Regional Distributions Centres (RDC) were at the end of their useful lives. Consequently stock shortages were common and on one occasion all the depot systems crashed when Sainsbury tried to order goods in a different way. It was widely understood that a new IT initiative was the need of the hour to cater to 19 depots and 12 Primary Consolidation Centres (PCC). In 2000 with a new CEO an end-to-end overhaul saw a new beginning with Accenture supplying a brand new supply chain management system. New business initiatives like a loyalty programme were also initiated. Transformation began with a budget of $ 1,8 billion and was to be completed by 2005. Accenture and Sainsbury's agreed that what was needed was an agile IT infrastructure built on an open, adaptive, scalable architecture with hardware and software systems that would give very high performance, strong data security, and low total cost of ownership. Apart from IT the retailer was diversifying in other ways. It planned gigantic Fulfillment Factories. Waltham Point in Essex is one of the biggest of the new automated distribution centres in Europe. It is the size of 10 football pitches put together, and is estimated to feed more than 80 stores and handle 2.6 million cases a week, being the base of 200 trucks and 300 trailers. This cost £70 million to develop and is the largest of Sainsbury's new fully automated centres it calls its 'Fulfilment Factories'. The company is developing around eight of these giant 'just in time' fast flowing perishable and quick turnover goods centres, closing its 21 older, smaller, less automated centres. Sainsbury's warehouses have already incorporated RFID technology for mobile scanning, with excellent results. One depot is now able to service 33% more stores, with further potential for line growth. Auto-ID practices initiatives will make the company's supply chain more efficient. Then in 2004 Sainsbury suffered a setback. It transpired that the IT initiative undertaken by it in 2000 was not working as planned. The CEO was forced to resign and a new CEO took over. He has overhauled the system and by 2007 the company came back into profit, although small in comparison with its turnover, and looking to recover lost ground. But there has been no IT initiative so far. It is unfortunate that the management lost faith in Accenture, but it is time it picked on someone to do the work for it. No doubt the fulfillment factories planned by it are working but their efficiency lies in the system. When the systems function at their peak, the efficiency of the FF’s will increase. Currently Sainsbury manages it suppliers through a portal called Sainsbury’s Information Direct. It aims to provide an online directory of useful information and applications to help managing relationships with its suppliers, called business partners. This portal is a B2B site that focuses on services to support the supply chain. Toolkits like PDS, Horizon, Udex, Insight, Primary, Online Negotiations, Complaints, EDI and Logistics are displayed on the site which can be accessed by the authorised supplier for exchanging information and concluding business transactions. One of the services it provides its supply chain is how Brandbank helps the suppliers to pack and display their goods to enable the customer to identify and pick items. Image from Sainsbury’s to You .pdf The site contains many documents meant to assist the supply chain in managing smooth flow of goods as well as rules, regulations and guidelines. However this is not a replacement of a supply chain management solution. It adds more paperwork and the information flow is not in real time. Unfortunately Sainsbury has gone back to its old ways as far as IT is concerned. B2B Portals and other measures cannot replace software solutions and while everyone else in the industry has some solution or the other running successfully, it is strange why at Sainsbury there is reluctance to follow proven examples. On the positive side is the fact that Sainsbury retains a loyal core shopper base and in addition it is now targeting non-food as a source of sales growth. It should also benefit, to an extent, from its perception as being a more up market retailer as compared to its rivals. 8 Case Study 2 – Tesco Until the mid 1990’s Tesco had a simple supply chain plan in place. A rapid replenishment plan based on demand triggered by customers pick up from shelves across all store formats would ensure that same suppliers using cross-dock distribution centres would fulfil the requirements through vehicles that would serve many stores. The reason behind this was that prices were negotiated for the entire network of stores and not by type of store and that the same replenishment system would make the common run to all large stores and the smaller ones that were logistically in between. This would eliminate higher cost to the weak links of smaller stores who would share the cost with their larger counterparts. In 1997 Tesco approached the Cardiff Business School in Wales enquiring how it could use the Toyota system to reduce time and effort in their logistics system. Tesco officials were asked to make a walk-in survey of the cola regional distribution centre (RDC) at Britvic. To their amazement they discovered wastages at every step of the process beginning from retail distribution and working backward through the bottling plant, the filling lines of cola destined for Tesco and the warehouse of the can supplier. They could visualize the savings that could be made at each step and what it could do both for customer satisfaction and contribution to the bottom line of the company. Tesco realized that there was great opportunity for changing the practices of getting supplies from the supplier to the shelves at Tesco. The first step was to transfer the point of sale data in the store directly to the dispatch in Tesco’s RDC. This generated actual requirement based on consumption and regulated the orders. Then the frequency of delivery to the stores was increased. The result of this experiment, carried over years of learning, now Tesco’s trucks leave the RDC every few hours around the clock carrying the cola proportionate to last few hours sales. The replenishment is now more accurate. The cola is now received at the Tesco RDC directly from the supplier’s bottling plant in wheeled dollies that are rolled directly to the point of sale and placed there. The racks have been eliminated. This innovative method has reduced several activities and saved employee time earlier spent on transferring cola from pallets to roll cages, to store, to dollies and finally to shelves. During the exercise it was discovered that half the cost of labour was involved in filling the shelves of the store. It was a great saving. For a fast moving item like cola the Tesco RDC now functioned as a cross-dock rather than a warehouse, saving on valuable space. As a buffer a few dollies of cola were stocked to take care of a sudden surge in demand. Since the replenishment is e very few hours this buffer is very small. . The changes at Britvic were much larger and cost effective. The bottler now fills up according to requirement in smaller batches thus improving the flexibility of its bottling lines. The reliability factor has gone up and there are practically no finished goods waiting for orders. The improvement is logistics was that Tesco’s delivery trucks took filled dollies from the bottler and delivered to various stores, simultaneously picking up empty dollies from each place and delivering them back to the bottler and picking up fresh filled dollies to restart the cycle. This way several Truck miles are saved each day by reducing freight costs and adding to ultimate profits. It also reduces total inventories at each point of sales as well as the RDC. The saving on touches or handlings on the product has reduced from 150 to 50. This is a remarkable performance and the costly human effort has been reduced greatly. Besides the total throughput time, from filling line at the supplier end to the customer leaving the store has been reduced dramatically from 20 to 5 days. The number of stocking points has been reduced from 5 to 2 being the RDC buffer and the roller racks at the store. The supplier RDC has been eliminated altogether. Tesco have realized that the rapid replenishment idea remained the same, the supplier and the RDC did not change, but what changed was the concept based on Lean Logistics. With this experience Tesco set out to create different store formats to enable the customers to obtain fast moving consumer goods from different kinds of outlets. Tiny Tesco Express convenience stores were designed at gas stations and at busy urban intersections. Tesco Metro stores followed on the lines of small supermarkets on busy streets and in high density urban localities; traditional supermarkets came up in urban and suburban areas; Tesco Extra were build on suburban perimeters; and finally the Tesco.com for the on-line shoppers. Tesco now has a full range of formats and will not let any customer feel left out of its service range. Needless to add here, that the FF’s play a vital role in making this possible. This pioneering effort has placed Tesco at the top of the market with a huge market share of 32%, far above any competitor. Tesco further introduced loyalty cards which offered discounts to frequent shoppers. In fact 80% of all sales are to loyalty card holders. This shows the vast hold Tesco has over its customers. It has since posted higher margins by offering its customer a host of formats to shop from. It has in the process established the lowest cost for itself, unmatched by even Wal-Mart. Another feature has been that its customers are now able to get almost 100% of their requirements at one store only. The utilization of a range of formats, plus detailed knowledge about specific consumers, will increasingly allow Tesco to offer each household a variety of items at lower total cost. (Womack. James P,. and Jones. Daniel T, 1990) Yet another innovation in the offing is the Stock Keeping Unit (SKU). This is conceived as a store within a store. Tesco employees pick up orders in a small store for whatever the customer wants and process it on his behalf on the web for home delivery. Imagine replacing the need of a brick and mortar store by your employee who is filling orders thus saving the space required by a larger store format that cannot be supported at every nook and corner. This will be an amazing feat of expansion in business without any investment at all. The costs are automatically reduced and employees are filling orders at no cost to customer, who would have had to either access the web or to go to a larger store to fulfill his need. All these moves will need the Fulfillment Factories to act as the fulcrum to fulfill the customer demands. Without them the whole concept will fail. 9 Conclusion Given the enormous increase in retailing of every hue and colour, Fulfilment Factories stand out as one central place from where the retailers can finally cater to their customers needs. Timely deliveries of on-line orders are indeed totally dependant on these FFs and without them the on-line sales are impossible. The extent and reach of retailing through the web is immense as is growing by the day. The convenience it offers the shopper is undeniable and this format is bound to become more popular. But this is one part of the story. The delivery of the goods ordered and paid for has to be meticulously executed and this needs a fulfilment factory that is highly organized with both inward and outbound logistic support that can ensure delivery within the timeframe committed to the customer. In the final analysis there can be no on-line business without the existence of efficient FFs. In the case of retail chains too the importance of FFs cannot be denied. They are replenishment centres and no sooner than the goods are picked up from the shelves by the customers, they are brought into the supply lines by the FFs on predetermined programmes. The FFs ensure timely deliveries to the numerous outlets and they have reached a point of specialization that they are able to cater to a number of outlets in an efficient manner. They also serve as RDCs but on a much bigger scale than the RDC of yesterday. Indeed the transaction levels are mind-boggling and had it not been for software solutions that are based on Lean Technologies and JIT concepts, this would not have become possible. In conclusion therefore it has to be stated unequivocally that the concept of FF was a boon for the retail industry and it is expected to expand and develop further with retail sector growing at a steady pace. 10 Bibliography RNCOS Report available at: http://www.rncos.com/Press_Releases/Household-Income-Influencing-The-Growth-Of-UK-Retail-August.htm Shlesinger. Joseph,. et al, Order Fulfilment, Delivering e-Promise, Ivey Management Services ¥ July/August 2001 Sainsbury Information Direct available at: www.sainsburys.co.uk/sid/info_dep_asn.htm Womack. James P,. and Jones. Daniel T,. Lean Solutions: How Companies and Customers Can Create Value and Wealth Together, 1990, Copyright 2005 by Solution Economy, published in October 2005 by Free Press, a division of Simon & Schuster. Read More