Balancing management and visibility in logistics

While some retailers want to manage the transportation link from factory floor to front door, it's not a sound strategy for everyone.

It sounds like a prosaic story--major retailer deploys logistics software to manage the shipping of goods to its stores and reduce transportation costs. But it's anything but prosaic. It actually represents a significant shift not only in how companies are looking at their logistics, but the next logical step they should take in e-commerce.

The company is Tesco, the U.K.'s leading retailer. It has 729 stores in the U.K., and 250 more throughout Europe and Asia, and it stocks 50,000 different product lines. In the U.K., initially, it deployed Global Command and Control Center logistics software (aka GC3) from a Shelton, Conn.-based company named G-Log to gain visibility into its logistics systems--planning, control, and monitoring. But in doing so, it's driving into territory that's heretofore been the territory of suppliers, not retailers.

The path Tesco is taking, while newly blazed, is not for everyone. There are situations where visibility alone is sufficient, and retailers like drugstore chain CVS are steering down that road. As with most business decisions, it's a question of where you can save money. But in either logistics scenario, there's a big payoff if you choose the right answer.

Traditionally, retailing has two separate but distinct distribution channels, or DCs. The primary distribution channel flows from the factory to regional distribution centers. The second distribution channel flows from the DCs to the individual stores. Because most major retailers own their own DCs, it's been fairly simple for them to manage that second distribution link. But in the last year, Tesco has taken over the primary distribution link as well.

"Within the supply chain, transportation represents a sizeable portion of our overall logistics costs, and it's enormously expensive for us. We wanted to manage the inbound freight from our suppliers to our distribution centers to improve efficiency and reduce costs," says Alex Laffey, Tesco's director of primary logistics operations.

According to Laffey, Tesco felt this was an easy area in which to eliminate what it considered to be inefficiency in the shipping process, especially when partially loaded trucks arrived from multiple manufacturers at the DCs.

Who can take over?

You may think that a thrust like this is only possible for a heavyweight like Tesco, but that's simply not true. "It's very much of a trend" among retailers, confirms AMR Research analyst Gerald McNerney, who thinks it would work for companies that spend upwards of $25 million annually on shipping. He cites grocery chain Giant Eagle and shoe manufacturer Brown Shoe as U.S. companies taking these steps, using software from companies such as G-Log and its competitors: i2 Technologies, Manugistics, Lean Logistics, Red Prairie, and Logistics.com.

"For eons, the shipper or the consumer packaged-goods supplier has been managing the logistics and deliveries to the retailers. But the retailers have come to the conclusion that they were being charged more than these operations require." McNerney compares the situation to a car dealer who can sell a vehicle below the list price because there's so much buffer built into that figure.

Not for everyone
It's important to note, however, that not every retailer is convinced this is a valid strategy. CVS, which has 4,100 stores and 10 distribution centers in 32 states, considered such software, but ultimately decided that it needed visibility more than control. It deployed Descartes Systems Group's Global Visibility and Inventory Control software but leaves the logistics to its suppliers. "Even though the suppliers make transportation a profit center," says Bruce Gordon, Descartes' senior vice president of products and marketing, "it would still cost CVS more to do it themselves."

Whether you want to take control as Tesco has, or get better visibility as CVS has, it doesn't matter. What matters is getting in front of an even more important trend--getting a better understanding of the relationship between how products get into the store and how well they sell once they're there. One of the reasons CVS deployed Descartes' software, according to Gordon, is to better time its promotional efforts. Getting the visibility into when deeply discounted items would arrive at stores helps make advertising more efficient and avoid disappointed customers who might otherwise come in looking for bargains and find empty shelves.

It's the next step for e-commerce in general, says McNerney. "Once you have good control of delivery mechanisms, you can more reliably optimize your entire operation. Before, companies just thought about having a Web site. Now they're looking for operational excellence."

What's your logistics approach? TalkBack below or e-mail Howard.