Final Project Logistics and International Trade

University of Liverpool

1. Introduction The aim of this project is to analyse the logistics of two separate supply chains operating in different industries so as to identify the main challenges the industries and the current market conditions place on them and how the supply chains are managed and optimized to bring competitiveness to the both companies chosen for this project. It has been identified that logistics plays value added role in providing the products/services to the customers; furthermore, logistics have provided the catalyst for major enhancements to the business of various companies (Rushton, 2010). The companies whose respective industries and supply chains will be analysed in this project are Cool Cargo and Benetton, the former operating in the Foods industry, the latter in the Apparel industry.

2. Benetton and Apparel Industry. a. Apparel Industry Apparel industry with the worldwide turnover of approximately 900 billion (Friedli, n.d.) in 2000 is identified as the industry whose main characteristics are as follows Buyer-driven, fragmented supply chains The vertical structure of commodity (in this instance, apparel) supply chain is coordinated and dominated by downstream intermediaries, rather than upstream manufacturers (e.g. in auto industry) (Friedli, n.d.). The industry is dominated by large organizations and the production is usually outsources to low-wage countries as apparel production is highly labourintensive. About 30% of the world production is exported (Friedli, n.d.). Blurring boundaries amongst the retailers, branded marketers and branded manufactures, each competing against each other. High demand uncertainty and long lead times. The life-cycle of products is very short, the variability of products is large and there is great unpredictability in the fashion trends, which can result in supply shortages or surpluses; unless production levels and inventory policies are carefully forecasted. Increased importance of speed and flexibility. With the increasing number of smaller orders and the changes in the fashion trends, speed to react to customers demand and ability to set-up new productions are of paramount importance. Demanded shorter lead time add even more pressure. It is all about the ability to accurately read early sales numbers, developing new capabilities in communication, coordination and product development whilst

ensuring introduction of new designs and ability to produce only what sells (Friedli, n.d.).

b. Benetton Benetton Group is well-known garment producer and the retailer with its headquarters located in Italy. The company was founded in 1965 initially manufacturing for other retailers (Dapiran, 1992). It is represented in approximately 120 countries and has a network of around 5500 shops (Camufo, 2001). The companys main products and services can be divided into three main areas: Casual wear Sports wear Complementary activities (royalties, sales of raw materials and advertising services) (Camufo, 2001).

Identifying the main characteristics of the apparel market the company operates in, Benetton identified the importance of agility of its supply chain, starting with the production. As previously identified, the ability to catch the current trends and the volume of products required are important for the apparel company to run efficient operations. Efficient consumer response (ECR) is the concept that allows a streamlined approach to the supply of products to the retails stores (Rushton, 2010:203). This approach is facilitated by the advances in the information technology. Benetton implemented this concept by introducing EDI technology into the supply chain. This allows for a much quicker and accurate capturing of the current trends and quantities of products required as the information is collected from the retailers every 24 hours, by doing so eliminating the filters between the customer and the production (Camufo, 2001). The apparel industry is highly-labour intensive. For Benetton, it was the matter of taking advantage of the economies of scale while outsourcing the activities that the company perceived itself not to have a real competitive advantage in. As Christopher (2011) pointed out the company is to consider outsourcing of activities to a company who can provide cost or value advantage. In fact, Benetton kept the ownership of high technology production elements (CAD technology in-house garment design) and outsourced the labour-intensive operations to small family owned enterprises with lower cost structure (Camufo, 2001).

Flexibility of the supply chain is also achieved through maintaining low inventory levels whilst meeting the demand as fully as possible. Postponement can be identified as a method of manufacturing that attempts to delay the final definition of a product to the last possible stage in the supply chain (Rushton, 2010:167). This method is actively used by Benetton in the production of knitwear. Knitting is considered as a slow process, therefore to be able to meet the customers demand and customers expectations of ever shorter delivery times, the manufacturer would have to keep high inventory levels of various products of different colours and sizes. This would inevitably result in either stock shortages or excesses. By delaying the dyeing of knitwear, Benetton minimised such risks. Distribution logistics of Benetton Group is carried out via the highly automated distribution centre. The produced garments are delivered straight to the distribution centre already packed in one of two standard boxes which are barcoded and pre-addressed to customers (Camufo, 2001). High automation of the distribution centre functions allow simultaneous put-away and retrieval to maximize efficiency (Camufo, 2001). Benetton supply its products directly, not via the wholesalers or regional centres, by means of air freight to achieve high level of response. Working directly with the airfreight companies (not the freight-forwarders) and having established WIDE (Worldwide Integrated Distribution Enterprise) to manage the international forwarding and customs clearance functions, the company managed to reduce physical distribution costs by 55% and lead times to the USA from 22 days to seven days (Camufo, 2001).

3. Foods Industry and Cool Cargo a. Foods Industry Since 2005, foods industry has seen the rise in the base food prices (Deloitte, n.d.). The rise of the food prices has been attributable to the factors as follows: Increased consumer demand (incl. demand for meat, fish and dairy products which increased the demand for grains, as an example) Increased industrial demand (e.g. for ethanol production in the USA) Declining agricultural land use and efficiency (as a result of urbanization) Increased oil prices Inflation (Deloitte, n.d.) Apart from the increasing food prices, the foods industry has also seen changes in the consumer demand. Consumers demand convenience and are prepared to pay more for the products (Deloitte, n.d.). There is also a tendency

to increased healthy eating habits. For example, fresh asparagus consumption in the USA increased by 86.44% from 1990 to 2007 (Figure 1).

Figure 1: TAA (n.d.) These trends have direct impact on the suppliers, and consequently their supply chains to become more cost- and time-effective, as increased input (incl. distribution costs) cannot always be relayed to the retailers as they have considerable bargaining power. If the transportation to the retailers is paid for by the retailers, ensuring cost- and time-efficiency of the supply chain is as important, especially when the transportation cost can amount to as much as 70% or RRP of a taken product. b. Cool Cargo Cool Cargo is a group of companies that provides cold chain and operations logistics solutions to its customers in distribution of the fresh produce from the production sites in Thailand to the retailers around the world, using their expertise in inbound transportation, ground handling and air freight. The main issues the company provides services in dealing with are the quality and the overall cost of the delivery of the fresh produce. As far as quality is concerned, the company identified the areas of improvement in both handling and transportation of the fresh produce. Having inspected the handling and transportation practices to the airport terminal, the company came up with the solutions to decrease the risk of heat exposure, such as introducing cooling rooms and shortening the loading/unloading times through introduction of pallets, thus cutting the loading/unloading times from one hour to 15 minutes. The company also works together with all the parties to ensure supply chain integration through process-oriented approach rather than function-oriented.

Due to the nature of the products delivered to the retailers, the overall cost of transportation may amount to as much as 70% of RRP, therefore theres an increased importance to keep the overall cost of transportation as low as possible. Increased oil prices put extra burden on the supply chain in ensuring competiveness of the products produced in Thailand. Cool Cargo tackled this problem by reducing the cost of ice freight, thus increasing the capacity of the net products that can be transported on a cargo plane. By decreasing the space required (est. by 30%) to transport a certain amount of net produce, Cool Cargo provides a benefit to the airfreight companies, as this enables them to sell more freight units on a taken plane. This benefit can then bring down the cost of airfreight to the products distributed by Cool Cargo. Furthermore, by reducing the space required for delivery of net produce, Cool Cargo provided greener logistics solutions (est. reduced carbon footprint by 30%), which may be perceived by the end customers as an added value or a deal breaker, as more consumers become more concerned about the environmental issues.

4. Conclusion. From the analysis of the both supply chains it can be pointed out that both supply chains are designed to deal with the volatility of the demand, its uncertainty, and trends attributable to their respective industries apparel and foods. Both companies realised the importance of agility of the supply chain and the value the effective supply chains brings to their companies/clients; as well as the cost of transportation, storage and handling. Both companies centralised their distribution through introduction of the distribution centres. In case of Benetton, there is one major distribution centre, in case of Cool Cargo they can be divided into the outbound airport terminal distribution centre, packing houses, destination airport terminals and distribution centres of the supermarkets. When designing the optimum number of distribution centres the square root rule as well as calculated balance/trade-off between transportation costs, responsiveness, and inventory levels are to be exercised. Process orientation and avoidance of mere sub-optimization of functions allowed the companies to cut the cost their supply chain (supply chain solutions) and become more responsive, by, in case of Benetton, introduction of postponement, use of airfreight deliveries, in case of Cool Cargo collaboration with the airfreight companies/shippers through improved packaging and minimised ice freight.

References: Asparagus from Thailand (n.d.). Video [Online]. Available from https://elearning.uol.ohecampus.com/bbcswebdav/xid-54498_4 (Accessed on 25 April 2012). Camuffo, A., Romano, P., & Vinelli, A. (2001), 'Back to the Future: Benetton Transforms Its Global Network', MIT Sloan Management Review, 43, 1, pp. 46-52, Business Source Premier, EBSCOhost [Online]. Available from http://ezproxy.liv.ac.uk/login?url=http://search.ebscohost.com/login.aspx?direct=true&db =buh&AN=6749170&site=eds-live&scope=site (Accessed on 25 April 2012) Christopher, M. (2011) Logistics & Supply Chain Management. 4th ed. Harlow: FT Prentice Hall. Dapiran P. (1992) Benetton - Global logistics in action, International Journal of Physical Distribution & Logistics Management. Bradford: 1992.Vol.22, Iss. 6 [Online]. Available from http://ezproxy.liv.ac.uk/login?url=http://search.ebscohost.com/login.aspx?direct=true&db =eda&AN=ejs22865312&site=eds-live&scope=site (Accessed on 25 April 2012). Deloitte (n.d.) Food and Beverage 2012 [Online]. Available from http://www.deloitte.com/assets/DcomSpain/Local%20Assets/Documents/es_Food_and_beverage_2012_web.pdf (Accessed on 25 April 2012). Friedli T. et al (n.d.) Bringing Home Industrial Revolution: Insight from the Apparel Industry [Online]. Available from http://www.ifm.eng.cam.ac.uk/cim/imnet/papers2003/kickuth.pdf (Accessed on 25 April 2012). Rushton , A. Croucher, P. & Baker, P. (2010) The Handbook of Logistics and Distribution Management. Taschenbuch Kogan Page. TAA (n.d.) North American Fresh Asparagus Market [Online]. Available from http://taatrain.cffm.umn.edu/publications/NorthAmericanFreshAspHandout.pdf (Accessed on 25 April 2012).