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With crude oil forecasts only one geopolitical decision away from spiraling out of control, the rising cost of fuel is a major variable affecting the bottom line. With new hours of service regulations, new diesel engine requirements (resulting in lower fuel efficiency), insurance costs, and a steadily decreasing number of drivers available, transportation costs are rising at a compounded rate of 10 percent to 20 percent -- rates not seen in more than 10 years.
Historically, combined inbound and outbound transportation costs equal roughly two times the distribution costs. A recent Grocery Manufacturers Association survey found CPG companies' costs had risen 23 percent in the past three years to $1.69 per mile. Depending on a variety of factors, such as miles per gallon and pieces per truck, this could increase transportation costs between 20 cents and 45 cents per case. Our research and client experiences indicate that this is the point at which alternative sourcing arrangements should be considered for the geographically "undesirable" parts of your retail network.
The relationship between transportation and distribution center costs is also driving many important issues in the physical world, including distribution center locations, store networks, and the shipment origin point's EST. With the cost of a new grocery distribution center generally exceeding $80 million, these networks aren't easily revamped to take account of higher transportation costs.
Recent third-party logistics (3pl) transactions also suggest major 3pl suppliers are revisiting the strategies from the late '90s of consolidating their networks to geographies where they have strength, and selling off the remaining assets to others within the same business. Recent transactions by C&S Wholesale Grocers and Supervalu, Nash Finch Co., and Roundy's Supermarkets can perhaps be evaluated with this strategy in mind.
3pl consolidation and rising fuel costs together suggest retailers with widespread operations serviced by either internal or outsourced supply chains will face unprecedented increases in transportation costs, resulting in real and permanent cost increases to service all stores, particularly the geographically undesirable portions of their store network.
These structural changes will probably cause a shift in thinking by logistics professionals. These will be along three dimensions:
--Tradeoffs in warehouse vs. transportation, dealing with the new economies
--Enhanced traditional logistics
--A fundamental rethinking of the sourcing equation -- what products from where
This should, in the intermediate term, create a new set of enhanced requirements for information technology as an enabler -- in short, driving IT strategy in two important areas:
--IT-enabled traditional logistics -- doing more with less: These include IT-enabled optimization for full truckload, consolidation, break bulk, cost avoidance by minimization of out-of-route empty miles (still, by some estimates, 30 percent of miles driven), dynamic flow path assignment, visibility into transportation assets (where they are, how they're most effectively used), stronger transportation exchange plays, and multiple-stop itinerary generation. Most of these plays will require greater visibility/transparency, asset sharing, and trust/balanced scorecards.
--IT-enabled re-evaluation of the procurement process: Traditional relationships with suppliers, whether internal, or external in the case of a 3pl, have been "single thread," with all products from the supplier's warehouse at one cost. As the cost of transportation continues to increase, the costs of serving a far-flung retail base will rise, particularly where there's a strong mismatch between store locations and warehouse locations of the provider. At some point, the costs for managing a multiple- supplier network will be outweighed by the transportation costs of the traditional network. There are huge implications for IT as an enabler of this multisupplier network solution, and, executed correctly, there are upsides from a customer satisfaction standpoint as well.
IT shops in this environment must, at a minimum, be able to manage multiple costs for the same item and resulting implications on retail prices. Further, the management of this multisupplier environment will require enhanced automated reporting and highlighting of new critical key performance indicators on both supplier performance and product availability. Accounting and settlement will also be affected, as will procurement. The ability to dynamically evaluate different sourcing answers will become a critical success factor. Flexible IT store support, along with adaptive business processes, will additionally be required.
A further benefit to the investments needed to manage multiple suppliers in this new world may be greater flexibility for different assortments based on local sourcing. Local suppliers can provide access to a more customer-friendly assortment of items, to serve customers in need of an assortment that can be fine-tuned to the demographics and psychographics of an individual store neighborhood. These combined benefits should be considered when undertaking an evaluation of the required IT investment.
These critical factors and changes in the industry will drive IT strategy in new and exciting ways, ultimately requiring a scaleable, flexible architecture to handle these logistics-driven demands. All players will be affected to a greater or lesser degree by these cost increases, and those who can adapt quickly to the changes in the physical world, enabled by an agile IT environment, will be most prepared for the new reality.
Tom Schaumburg is a senior industry consultant in the Business Transformation Outsourcing, Consumer Goods, and Retail segment for EDS, where he provides advice about supply chain strategy, with the goal of helping companies strengthen their competitive position, increase market share, improve customer satisfaction, and streamline expenses, in addition to assisting in transformational outsourcing for retailers. He can be reached at email@example.com.