Home: Issue 1 2009 › Lead Story › A stark choice
A stark choice
10/03/2009 | Channel: Packaging & Logistics
Alan Braithwaite analyses the rise of 3PL logistics in the food and drinks industry
The food and drink industry has gone through a transformation over the last 40 years, which has been driven by changes in its logistics. It is important to recognise where we have come from and why in order to understand the future challenges for the industry.
Forty years ago the food business was dominated by brands which controlled and managed their own distribution to retail outlets. To achieve this they had large-scale logistics operations that they owned and operated. These operations were commonly group-wide distribution services; Unilever had SPD, Imperial had Lowfield, Heinz had more than 20 depots as did United Biscuits in its UBDS. The purpose of the multi-depot networks was to pick and deliver small orders directly to retailers’ stores.
The changes in logistics over 40 years were the result of a combination of three retail driven initiatives: private label products; centralised store delivery and the increased scale of retail outlets; and the growth of the chilled and fresh product area.
Private label was the initial driver. At the start of the change, private label products were unusual, with the exception of Sainsbury’s; they are now as much as 40 per cent of some retailers’ total activity and close to 100 per cent for the deep discounters. If the private label suppliers were the same plants as the brands, they were not prepared to make their distribution networks available to this low margin offer. The retailers had to organise and pay for the distribution.
Centralised store delivery was driven by three factors, the first of which was the private label requirement. The second big driver was that as the retail multiples started to grow market share, they found their store inbound processes very inefficient and unproductive. It was common to see long queues of vehicles in the high street; the booking-in process was clerically intensive and open to error and abuse. Finally, the introduction of edge-of-town superstores with an area of 20,000 square feet or more did not provide enough space for back room product storage; deliveries needed to be more frequent in smaller quantities than the minimums required by the brands to get good buying terms.
The growth of the chilled product sector followed the first drive to centralisation, but was supported by it. It is now common for a multiple retailer to take 30 per cent plus of its revenue from the chilled and produce area of its outlet. The acquisition of this share of the market with deli counter and long ranges of chilled cabinet has been a critical success factor. These products are perishable; waste through out of ‘sell-by date’ products is a major economic factor. As a result the product must be delivered to the stores on a daily order basis in case quantity. To respond to this high-speed supply chain, the retailers have put in place their own consolidation capabilities, getting the product to the right store in a matter of hours.
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The chart shows the change in the level of centralisation for the major UK retail chains between 1980 and 2000. The share of revenue that is centrally managed is shown as over 90 per cent and has now peaked at more than 95 per cent. It is interesting to see that Asda and Tesco were late entrants to the change and that Sainsbury and Safeway were the early movers. The growth of Asda and Tesco demonstrates that they may have taken some advantage from the experience of the early movers.
The process of centralisation re-enforced 25the share growth of the multiple retail chains as the volume through suppliers’ local depots was stripped out, making their residual business uneconomic. The big retailers discovered they could command improved commercial terms from the brands for taking over the distribution task; that accelerated their market share growth and was the death knell of the smaller independent outlet.
Manufacturers’ distribution networks have been dismantled as they have responded to central distribution demands of the retailers. SPD moved to Exel (now DHL); Lowfield went to Tibbett and Britten, which in turn also went to Exel.
The role of third party logistics service providers (3PLs) developed from this picture, giving them many years of double-digit growth. In essence this change created the industry in the UK in its current form. 3PLs were retained to provide the central warehousing and distribution for the big manufacturers, the chilled networks and central distribution for the retailers. The investment and expertise required to fund, construct and operate distribution centres of more than 400,000 square feet (40,000 sq. m.) did not exist inside the retailers or their suppliers; it was a new game and had to be played fast.
However, the market has now matured, the centralisation job is complete and
there has been major retailer and manufacturer consolidation, which can be expected to continue.
We are into a period of optimisation and refinement, with retailers and suppliers looking for economies and trying to leverage their scale. This phase of development has seen some major changes.
Firstly, some (but not all) retailers have taken back significant parts of their networks from the 3PLs and are now running their own sites and transport. The funding advantage for the investment was no longer a priority and they have taken in-house the operating skills. Retailers that have followed this policy have tended to keep a part of their activity outsourced; this provides performance benchmarks and the relationships to keep some flexibility for special situations. The second change has been the erosion of the profit margins of the 3PLs. Retailers and manufacturers have done what they do best and value-engineered the service: stripping margin out of the operation and forcing more onerous service targets onto the providers. With a few exceptions, service provision is now a low margin business with significant risks.
That takes us to the present day; what of the future? The biggest market place trend today is the resurgence of the convenience store, meeting the needs of customers who are ‘cash rich and time poor’. All the major food retailers are investing hugely in these formats and Tesco already has more than 1000 of this type of outlet. The second major market place trend is the increasing share of budget and discount products, responding to consumer priorities in the current economic conditions. The distribution consequence of these twin trends for retailers is that existing capacity is struggling to cope with the change in picking and storage profile. Retailers are reluctant to invest in new distribution centres in the current credit environment; each site costs £30m to £40m and cash is suddenly tight for many.
For manufacturers, sector consolidation is creating category leaders who can once more exert power through their brands. The balance is shifting back a little in their favour and they now also control the private label output. But margin pressures are forcing them to take a fresh look at efficiencies.
In theory this emerging landscape offers the service providers an opportunity to renew growth and improve margin by innovation in networks and services. Our work suggests that the potential lies in increased application of shared user networks and facilities to get economies of scale, reduce tonne-kilometres, maximise the utilisation of the delivery operation and increase service frequency. City hubs and platforms will be needed to address the congestion and environmental issues of inner city convenience shopping. We may finally be entering an era of true collaboration between retailers, manufacturers and their respective providers.
However, our research suggests that service providers are not respected for their ability to innovate; they are perceived to respond to, rather than lead, manufacturer and retailer initiatives: right or wrong. Of course, there are exceptions to this, but the perception is that providers are not seen as being proactive. We have found that the 3PLs tend to work to protect their existing margin rather than look for new services to replace and enhance it. While it is hardly surprising when the margins are already low, we found that this is attributable to capability issues in the areas of key account management, commercial control, systems and network design.
The choice for logistics providers is a stark one: innovate through services and capabilities to support the coming structural adjustments or wait to be a passive servant of retailer and manufacturer driven change. Collaboration can release more value across the chain than retailers and manufacturers trying to take money off each other. The vision is that 3PLs can help to shape that future and create that value; that is their challenge.
Alan Braithwaite is visiting professor at Cranfield School of Management, Centre for Logistics and Supply Chain Management, and Chairman of LCP Consulting, a specialist logistics and supply chain advisory company, working with retailers and manufacturers in the food chain.
He can be contacted at alan.braithwaite@lcpconsulting.com.
Forty years ago the food business was dominated by brands which controlled and managed their own distribution to retail outlets. To achieve this they had large-scale logistics operations that they owned and operated. These operations were commonly group-wide distribution services; Unilever had SPD, Imperial had Lowfield, Heinz had more than 20 depots as did United Biscuits in its UBDS. The purpose of the multi-depot networks was to pick and deliver small orders directly to retailers’ stores.
The changes in logistics over 40 years were the result of a combination of three retail driven initiatives: private label products; centralised store delivery and the increased scale of retail outlets; and the growth of the chilled and fresh product area.
Private label was the initial driver. At the start of the change, private label products were unusual, with the exception of Sainsbury’s; they are now as much as 40 per cent of some retailers’ total activity and close to 100 per cent for the deep discounters. If the private label suppliers were the same plants as the brands, they were not prepared to make their distribution networks available to this low margin offer. The retailers had to organise and pay for the distribution.
Centralised store delivery was driven by three factors, the first of which was the private label requirement. The second big driver was that as the retail multiples started to grow market share, they found their store inbound processes very inefficient and unproductive. It was common to see long queues of vehicles in the high street; the booking-in process was clerically intensive and open to error and abuse. Finally, the introduction of edge-of-town superstores with an area of 20,000 square feet or more did not provide enough space for back room product storage; deliveries needed to be more frequent in smaller quantities than the minimums required by the brands to get good buying terms.
The growth of the chilled product sector followed the first drive to centralisation, but was supported by it. It is now common for a multiple retailer to take 30 per cent plus of its revenue from the chilled and produce area of its outlet. The acquisition of this share of the market with deli counter and long ranges of chilled cabinet has been a critical success factor. These products are perishable; waste through out of ‘sell-by date’ products is a major economic factor. As a result the product must be delivered to the stores on a daily order basis in case quantity. To respond to this high-speed supply chain, the retailers have put in place their own consolidation capabilities, getting the product to the right store in a matter of hours.
')";>')";>The chart shows the change in the level of centralisation for the major UK retail chains between 1980 and 2000. The share of revenue that is centrally managed is shown as over 90 per cent and has now peaked at more than 95 per cent. It is interesting to see that Asda and Tesco were late entrants to the change and that Sainsbury and Safeway were the early movers. The growth of Asda and Tesco demonstrates that they may have taken some advantage from the experience of the early movers.
The process of centralisation re-enforced 25the share growth of the multiple retail chains as the volume through suppliers’ local depots was stripped out, making their residual business uneconomic. The big retailers discovered they could command improved commercial terms from the brands for taking over the distribution task; that accelerated their market share growth and was the death knell of the smaller independent outlet.
Manufacturers’ distribution networks have been dismantled as they have responded to central distribution demands of the retailers. SPD moved to Exel (now DHL); Lowfield went to Tibbett and Britten, which in turn also went to Exel.
The role of third party logistics service providers (3PLs) developed from this picture, giving them many years of double-digit growth. In essence this change created the industry in the UK in its current form. 3PLs were retained to provide the central warehousing and distribution for the big manufacturers, the chilled networks and central distribution for the retailers. The investment and expertise required to fund, construct and operate distribution centres of more than 400,000 square feet (40,000 sq. m.) did not exist inside the retailers or their suppliers; it was a new game and had to be played fast.
However, the market has now matured, the centralisation job is complete and
there has been major retailer and manufacturer consolidation, which can be expected to continue.
We are into a period of optimisation and refinement, with retailers and suppliers looking for economies and trying to leverage their scale. This phase of development has seen some major changes.
Firstly, some (but not all) retailers have taken back significant parts of their networks from the 3PLs and are now running their own sites and transport. The funding advantage for the investment was no longer a priority and they have taken in-house the operating skills. Retailers that have followed this policy have tended to keep a part of their activity outsourced; this provides performance benchmarks and the relationships to keep some flexibility for special situations. The second change has been the erosion of the profit margins of the 3PLs. Retailers and manufacturers have done what they do best and value-engineered the service: stripping margin out of the operation and forcing more onerous service targets onto the providers. With a few exceptions, service provision is now a low margin business with significant risks.
That takes us to the present day; what of the future? The biggest market place trend today is the resurgence of the convenience store, meeting the needs of customers who are ‘cash rich and time poor’. All the major food retailers are investing hugely in these formats and Tesco already has more than 1000 of this type of outlet. The second major market place trend is the increasing share of budget and discount products, responding to consumer priorities in the current economic conditions. The distribution consequence of these twin trends for retailers is that existing capacity is struggling to cope with the change in picking and storage profile. Retailers are reluctant to invest in new distribution centres in the current credit environment; each site costs £30m to £40m and cash is suddenly tight for many.
For manufacturers, sector consolidation is creating category leaders who can once more exert power through their brands. The balance is shifting back a little in their favour and they now also control the private label output. But margin pressures are forcing them to take a fresh look at efficiencies.
In theory this emerging landscape offers the service providers an opportunity to renew growth and improve margin by innovation in networks and services. Our work suggests that the potential lies in increased application of shared user networks and facilities to get economies of scale, reduce tonne-kilometres, maximise the utilisation of the delivery operation and increase service frequency. City hubs and platforms will be needed to address the congestion and environmental issues of inner city convenience shopping. We may finally be entering an era of true collaboration between retailers, manufacturers and their respective providers.
However, our research suggests that service providers are not respected for their ability to innovate; they are perceived to respond to, rather than lead, manufacturer and retailer initiatives: right or wrong. Of course, there are exceptions to this, but the perception is that providers are not seen as being proactive. We have found that the 3PLs tend to work to protect their existing margin rather than look for new services to replace and enhance it. While it is hardly surprising when the margins are already low, we found that this is attributable to capability issues in the areas of key account management, commercial control, systems and network design.
The choice for logistics providers is a stark one: innovate through services and capabilities to support the coming structural adjustments or wait to be a passive servant of retailer and manufacturer driven change. Collaboration can release more value across the chain than retailers and manufacturers trying to take money off each other. The vision is that 3PLs can help to shape that future and create that value; that is their challenge.
Alan Braithwaite is visiting professor at Cranfield School of Management, Centre for Logistics and Supply Chain Management, and Chairman of LCP Consulting, a specialist logistics and supply chain advisory company, working with retailers and manufacturers in the food chain.
He can be contacted at alan.braithwaite@lcpconsulting.com.
