April 2000

E-business is going to be highly reliant on outsourced logistics to maintain expected growth patterns. Sharon Clancy has been finding out how well the contractors are prepared

As the Internet retailing revolution gathers pace, it is becoming increasingly clear that the third-party logistics sector has a vital fulfilment role to play. Start-up retailers seldom have either the knowledge or the resources to mount their own delivery operations, while existing "bricks and mortar" retailers moving into new channels are finding home delivery to be alien and often problematic territory.

During the early days, express parcels carriers have dominated the third-party fulfilment sector, but the big contract logistics specialists are now realising that there is also a place for them. Where the product is too big for a parcels operation to handle, clearly a more dedicated resource is needed. Even where it is not, they see a wide-ranging management role for themselves. One thing the big contractors often have in their favour is extensive experience of logistics IT; and this is becoming even more valuable in the new e-enabled era not just for Internet fulfilment, but also in what might be termed more "conventional" logistics.

However, it seems too early for any definite pattern to have emerged in terms of what the logistics providers should offer to meet the demands of the new electronic age. Some contractors are focusing on their IT capability, others on their practical credentials. So would-be users need to consider their own requirements carefully, and then assess the relative strengths of the various contenders.

Certainly there seems to be no shortage of contractors moving into the e-commerce arena. Hi-tech specialist New Wave Logistics announced the creation of a comprehensive fulfilment service this year (News Update, page 4), and TDG has also committed itself to the market (interview, page 28).

Another company on the verge of announcing a new e-commerce strategy is Securicor Omega Logistics, whose managing director Peter Brown says: "E-commerce (buying and selling over digital media) creates new expectations and requirements for the logistics industry. E-commerce will have a significant impact on manufacturers and retailers, enabling them to reconstruct and deconstruct their supply chains for greater advantage."

His company is understood to be synchronising its investments with sister-company Securicor Omega Express, the express parcels carrier to create joint e-commerce solutions. We will bring further details in an early issue. So what are the key e-logistics issues that the contractors feel they need to address?

For many logistics service providers, supply-chain collaboration with suppliers, manufacturers and retailers is the key to the contribution they can make. That is certainly the view of Dave Fawcett, business development director for Wincanton Logistics. He envisages a world where inter-company communities will emerge to share procurement, sourcing and distribution of common product, and non-competitive organisations will pull together warehousing and distribution activities to bring out synergies. "There can also be collaboration between manufacturers and retailers on planning, forecasting and replenishment."

Richard Lord, managing director of CPG Logistics, the pharmaceuticals specialist, believes the growth in business-to-business e-commerce will come from sharing of data. Lord thinks many business will be able to adapt enterprise resource planning software to encompass electronic supply chain management. "ERP coupled with an enterprise-wide Internet strategy has the potential to deliver massive cost savings in the supply chain. The challenge is to use ERP to look outwards as well as inwards." Manufacturers must be willing to share information with suppliers, stockists and customers, says Lord, and this can now be done without loss of confidentiality or control. "We use Internet and intranet technology so that anyone with access to a browser and a suitable connection can effectively become a part of the e-business team. Smaller businesses will have a chance to compete on a level playing field, becoming integrated with customers who are operating their own ERP, but making only marginal investments in IT at the Web interface."

Paul Pegg, managing director of Christian Salvesen"s temperature-controlled division, says that doing business electronically is already deeply embedded in the company"s culture, in the sense of sharing data with customers and partners. "We believe e-business truly enhances efficiency and service delivery for our customers across the UK and on the Continent. We have a strong in-house information and communications technology capability, and shared-user networks across Europe." As far as businedss-to-consumer e-commerce is concerned, because it is in its infancy, one problem facing logistics companies is assessing the accuracy of volume predictions. What suits a business seeking fulfilment services in the early days may not be the most economical delivery system for it in six months" time.

Shared-user logistics services are the ideal solution, according to Tim Slater, managing director of MSAS McGregor Cory. "It is a variable-cost solution low-cost when traffic flows are small, yet offering the ability to cope with big increases in volume." Slater says his company is prepared to get involved at every stage of the e-business process. "Partnerships are the solution, whether on front-end call-centre handling and payment-collection or on home delivery."

Logistics provider Cert established an e-commerce division last October. Its managing director, David Sones, thinks Cert is in a unique position to exploit Internet-based buying of wines and spirits, whether within the trade or for consumers. "We"re not just another wine company with a Web site. We have 20,000 bottles of wine in storage, and we have the logistics expertise to deliver." Later this year Sones plans to publish a consolidated catalogue for all the importers for which Cert holds stock. The aim is to squeeze both time and cost out of the supply chain for the hotel and catering industry. "It"s one-stop shopping. Currently these businesses contact each supplier separately, and they in turn contact us to arrange delivery. If the timing is wrong, that can mean separate deliveries. Consolidating them will be cheaper and more efficient both for our clients and for their customers, who need to be there only to receive one delivery."

The business-to-consumer market takes logistics service into unfamiliar problem territory. The challenge is to provide a solution that does not add any cost for the retailer (and ultimately the consumer). Some LSPs are developing in-house services that complement existing infrastructure for handling unitised loads. Others are investigating collaborations with conventional parcels delivery companies.

Wincanton"s David Fawcett believes the grocery sector provides one of the major opportunities for logistics specialists. "Fulfilment of product will be a major influence on the success of such operations. It is our belief that the solution for fulfilment will not be from the retail store. This will become too costly and it will not allow retailers to exploit home shopping in areas of the country where store presence is poor."

Richard Lord of CPG thinks different home delivery time-periods will become established, perhaps needing different delivery strategies. "Pre-9am could be done by a parcel delivery company, while post 4pm periods need perhaps a local agent." He does not see home deliveries in themselves as a problem. "We already support people who work from home. Consumer deliveries are simply an extension of that." He does think, though, that CPG"s involvement would be limited to non-perishable items where the risk of returns is low. "Home deliveries of fresh food and clothes require special expertise." Lord predicts that increasing traffic congestion might force a somewhat dramatic solution to urban deliveries. The Government is committed to decreasing congestion in towns, he points out, so councils might find themselves empowered to levy prohibitive taxes to deter vehicles entering towns. "That will push up the cost of deliveries, so some collaboration between delivery companies will be necessary to offset that."

Lord has visions of an even more radical scenario; councils might award one logistics company the contract to handle all city-centre or household deliveries in a given area. That LSP would manage all the suppliers feeding into it. MSAS McGregor Cory"s Tim Slater agrees that delivery agents may be the best solution for handling evening deliveries. He envisages local delivery franchises either individuals using their own cars, or garages or some other community focal point acting as an official drop-off point.

Warehouses will become order fulfilment centres, designed to handle both single-item and multiple- or batch-order picking. Tim Slater says one of the biggest changes LSPs will have to manage in business-to-consumer operations is the change from handing a few hundred orders a day to thousands. "We are moving to paperless order-processing. It"s the only way to manage the quantity of orders involved." Picking and order confirmation will have to be done electronically. "With high volumes, designing an efficient picking system is crucial to controlling costs. Picking out of pallets rather than off shelves eliminates the need to replenish the shelves, but slows down the order picking process. "

Tibbett & Britten has already transformed one of its warehouses for this type of operation. This follows the setting-up of Track One Logistics, a joint venture with the Telstar Entertainment group. A 120,000 sq ft warehouse in Telford has been refurbished and a Pkms warehouse management system from Manhattan Associates has been installed to speed order processing. Track One specialises in the distribution of entertainment goods to consumers" homes and into conventional retailer regional distribution centres. "We use whichever distribution method is appropriate either mail order or the Tibbett & Britten distribution network," explains managing director Tony Baxter. Besides music wholesalers startle (it is very keen to have a lower-case "s") and Lightning Export, the two other major clients are computer games company Sega UK and language-learning specialist Linguaphone. Track One holds over 25,000 music and video tapes, and distributes 3,500 different Linguaphone courses. For Sega it despatched 100,000 Dreamcast consoles in the first week of its launch, both into RDCs and to consumers ordering direct.

Computer software is vital in managing the order fulfilment side of home shopping. One example can be seen in an operation of Exel (formerly Logistics), which has had plenty of experience of home deliveries in its vast empire. As part of a long-standing operation for Hoover, it manages trunking operations between Hoover"s three UK factories, as well as distribution into retailer RDCs. Hoover does not sell direct to customers, but found it was increasingly being asked to deliver appliances direct to their homes on behalf of retailers.

Exel manages these deliveries using the Traderman Systems" FreightDesk software. Exel"s contract manager Keith Williams thinks the Internet will increasingly used by retailers to track orders. "Instead of ringing Hoover, they will be able to check on delivery dates via the Internet. That not only saves call centre costs, but also makes the whole order system more transparent which helps build trust."

Clearly the various third-party contractors are all approaching the e-commerce era from slightly differing starting points. Certain common themes are now emerging among them (for instance, the need for shared operations and added-value services), but there seems some way to go before we can point to anything resembling a "classic" e-logistics fulfilment service. However, the pointers are there, and we can expect to see some rapid development over the next twelve months. There was seldom a better reason to watch this space.