Between the Lines-- June 2004

When evaluating a CG firm's initiatives in managing its supply chain, it is critical to consider the importance of fulfillment and delivery. The overlooked process of getting products from the manufacturers' warehouse to the retail distribution center in a timely fashion is a core element to an effective supply chain. This month, CGT caught up with Duane Sizemore, Vice President, Business Development, Retail and Consumer Goods, UPS Supply Chain Solutions. Duane discusses the importance of supply chain services and how smart CG firms are embracing the challenges presented by multi-channel distribution, order fulfillment and regulatory requirements.

How important are supply chain services in supporting a consumer goods company's multi-channel initiatives?

An efficient supply chain is critical when launching new channel initiatives because each channel has unique fulfillment and delivery requirements. For example, a web channel designed to deliver merchandise to retail customers at their homes is different than delivering pallet loads of product to retail distribution centers or multi-box shipments to stores.
On-time delivery requirements also vary. For example, where residential customers most often receive their packages at home after regular business hours, retail stores are open for longer time periods, but restrict the hours in which they will accept a delivery. The differences can affect the transportation choices and must match the needs of each customer.

Technology requirements are also different. Business customers may need information about their orders down to the individual item whereas retail customers often only want to know the delivery date of their merchandise.

The cost of order management and delivery also are a key concern when evaluating new market channel initiatives. Costs must be aligned with the overall goals of the program. For example, is achieving customer satisfaction the most important goal or is the goal to contain costs? That factor alone can determine what mode of transportation is chosen. Supply chain services affect the success of multi-channel initiatives both in terms of cost and customer satisfaction which will affect the likelihood of long-term and repeat business.

Talk about the differences between web channel distribution and traditional wholesale order fulfillment and how smart consumer goods companies separate the two processes.

It's the difference between orders of one or two items versus delivering pallets and truckloads. The infrastructure and operational structures are different. It's very difficult to integrate a web-channel fulfillment operation into a traditional distribution environment because of the different types of equipment used and packaging required.

Web-channel distribution requires more extensive integration with call centers and order management IT systems because of the larger volume of customer inquiries.

Our customers tell us that the separation of the two channels makes it easier to monitor the costs of the web channel and its profitability. The information mined from the web channel allows our customer to know their customers better. They learn about the unique buying characteristics of web-based buyers.

As the web channel evolves, our customers have found ways to use its connection with customers in ways they did not originally anticipate such as offering web-only promotions, charity events and targeted marketing based on known buyer preferences. They know which of their customers are brand loyal or who needs special sizes that are not often available in retail stores. This information gives them an opportunity to create unique marketing promotions, offer special packaging or cross-sell products and services. Merchandise bought on the web has a higher return rate so an effective reverse logistics process is vital. The process must be capable of receiving and evaluating merchandise for restocking, repair/refurbishment or disposal. It is a process not often performed effectively in a traditional distribution center.

A rising number of consumer goods firms are distributing directly to stores. How does a DSD model lead to potentially having to outsource a supply chain?

One of the greatest benefits of distributing direct from supplier to store is that working capital is free to be deplo yed elsewhere. By outsourcing the transportation management, customs clearance and international trade management functions to a third-party logistics company, consumer goods companies can use their resources for product development, marketing and sales.

However, even when a retailer considers implementing a direct-to-store delivery model many variables have to be taken into consideration. The variables include data transfer and delivery customization requirements and what systems and services their vendors have or are capable of providing. All of these functions have to be vetted to gain a true picture of the proposed outsourcing needs.

UPS Supply Chain Solutions has a service -- called Supplier Management -- that relieves consumer goods companies from dealing with the nitty gritty details of receiving orders from their suppliers. We take over right after the purchase order is delivered to the supplier. We make sure the order is shipped to port, we trigger the customers' quality inspections. We conduct the drayage from the supplier's office to the port and track the ocean or air shipment as it travels to the U.S. We handle the customs clearance and deliver the product to the stores, either through the UPS ground or air network. The status of the shipment by purchase order is available to the company on a web-based site. This service, along with others, allows consumer goods companies to outsource these functions so they can concentrate on their core competencies.

How should consumer goods executives begin using their multi-channel strategies to get closer to their consumers?

The old distributor model put consumer goods companies at arm's length from their customers. Many consumer goods companies weren't privy to their customer's buying patterns -- valuable information when designing marketing and sales initiatives. Direct-to-consumer means a company has insight almost immediately into what goods are moving fast, what's being returned and why, what is selling in specific regions -- all the way down to the zip code. A web channel allows for dynamic pricing. A tie-in with call centers helps to gather even more information. Marketing literature and promotional events can be more focused to meet customer interest and needs. UPS Supply Chain Solutions' fulfillment process includes the ability to use customized packaging and insertion of sales literature into shipments.

Consumer goods companies have realized tremendous challenges and regulatory requirements in international trade. How can they effectively meet those requirements while complying with their customers needs?

You've mentioned another reason why third-party logistics outsourcing makes sense. Because things change fast, 3PLs by virtue of what services they provide have to keep up with all of these changes.

If a consumer goods company decides to conduct international trade management themselves, they need to make sure that they have a dedicated team that tracks all the relevant changes, keeps informed about regulatory and compliance requirements, especially documentation and early-alert requirements which can substantially delay product delivery and can wreak havoc during peak buying seasons.

How is the supply chain services industry responding to the future needs of RFID?

UPS Supply Chain Solutions is currently managing a number of projects and is in preliminary discussions with several customers about implementing RFID. We are also involved.