Grosery and FMCG

Les Quatrimes Rencontres Internacionales de la Recherche en Logistique Fourth International Meeting for Research in logistics
LOGISTICAL ADVANCES IN CONSUMER DIRECT LOGISTICS SYSTEMS FOR GROCERY AND FMCG INDUSTRY: HOME REPLENISHMENT IN NUREMBERG BRINGING THEORY INTO PRACTICE
Alexander Pflaum, Fraunhofer Applications Centre for Transport Logistics and Communication Technologies, Nrnberg, Germany Background: The Need for New Solutions for Consumer Direct Logistics Operations in the FMCG-Sector A Very Short Trip into History History of Consumer Direct Logistics in the grocery or FMCG industry began 1989 with Peapod in Boston. The list of companies that started and stopped operation since then would fill pages and it doesnt make sense to enumerate all the names here. More important is the fact that three different time slots or phases can be distinguished since Peapod started business: E-commerce enthusiasm between 1990 and 1999, followed by extreme caution between 1999 and early 2001, followed again by pragmatic realism during the last year. Until autumn 2001 most capitalintensive companies (loud players) had left the market and only the cautious ones (silent players) had survived. Companies definitely have learned that it is necessary to set up scalable operations and to grow slowly with the market. Today the ecommerce market in the grocery sector seems to be stable.
Todays Situation: Concentration on High Density Areas But the fact that companies like Tesco in Great Britain and Capraboacasa in Spain have learned to grow with the market does not mean that all problems are solved. A study conducted by Germanys Fraunhofer Society in cooperation with ECR Europe in Brussels (Fraunhofer/ECR Europe 2002) shows clearly that successful Consumer Direct Logistics companies in Europe concentrate on metropolitan areas and conurbations. A high density of consumers is the best guarantee for profitability. The consequence is that especially the rural population is out of reach for real CDL-
services for grocery items and Fast Moving Consumer Goods. That evidently shows the necessity of research and development activities in this field. Future Solutions: Expanding the Concepts and Principles of Logistics and Supply Chain Management to the Last Mile of FMCG Distribution A first and interesting hint on new R&D issues can be found in Fraunhofer/ECR Europe (2002). The authors of the study analysed Europes CDL operations in a comprehensive desk research and conducted detailed interviews with twelve CDL companies in Spain, Great Britain, Austria, Finland and Germany in order to find and evaluate smart practices. They describe more than 60 different practices for three basic scenarios and come to an interesting conclusion: On the one hand, there are links between CDL providers and manufacturers like one concerning the update of product catalogues, the joint optimisation of assortment or avoiding out of stock situations which seems even more important in an environment of Consumer Direct than it has already been in the classical on-shelf business but, on the other hand, it is still hard to find related approaches of collaboration along the supply chains in practice. Another paper that has been recently published during this years NOFOMA conference makes it somewhat clearer: The basic principles of logistics and Supply Chain Management are not taken into account by existing CDL operations (Prockl/Wilhelm 2002). Here we find a promising starting point for coming R&D activities. Positive experiences with the ECR concept that is also described as the best known realisation of Supply Chain Management (Klaus 1998) justify research activities on potential effects of adaptation of basic principles to the needs of the last mile. This is especially true for Continuous Replenishment. In the following chapters well try to figure out what kind of benefits can be expected and how this principle could be adapted to optimise processes in CDL operations. From Continuous Replenishment to Home Replenishment: Adaption of an ECR Principle to the Needs of the last mile The Basic Principle of Continuous Replenishment Continuous Replenishment is one of the core concepts of ECR. The responsibility for restocking shelves in retail outlets is taken away from the retailer and placed on the supplier. The basic idea is to optimise the supply process and to guarantee
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continuous product delivery which exactly meets the consumers demands. Therefore Continuous Replenishment requires actual information or at least a good forecast on sales. One has to distinguish between information on shipments leaving the retailers central warehouse and data on real sales in the retailers outlet. In its perfect form Continuous Replenishment is based on actual sales. The supplier wins due to higher flexibility as far as the delivery process is concerned, easier planning processes, reduced stock level and stock capital etc. The retailers has additional benefits because of reduction of non-value adding activities like stock management, less out of stock situations, higher consumer loyalty etc.
Adaptation of CR to Last Mile Requirements: Home Replenishment What does the term Home Replenishment mean? At first sight the basic concepts of CR and Home Replenishment are the same. While the supplier replenishes products in the retailers outlet using his own logistics systems or a service provider in CR the retailer stocks up products in the consumers larder in the Home Replenishment concept using his own fleet or a home delivery service provider. In spite of that a closer look into details makes quite clear that the Home Replenishment idea opens up some additional questions and issues that are not relevant in the classical CR concept. The following list contains just a few crucial ones. Cost issues: Home Replenishment is a new concept for the consumer market. There are special requirements concerning the price for hardware and software that is used by the consumer and the costs of different steps of the order to payment flow. E.g. definition and communication of the basic needs is critical because a sales representative visiting the consumer would be too costly. Marketing issues: Consumers consumption profiles are much more individual and dynamic than selling profiles of retail outlets. Not every product is suitable for replenishment and not every segment of the consumer market will use the new service. Therefore there are open questions on the product portfolio that is needed to be offered and on the relevance of different consumer segments. Security issues: A efficient Home Replenishment system needs
comprehensive information on consumers habits and preferences and constitutes a significant intrusion upon the consumers privacy. The concepts
of data security and protection have to be an integral part of a Home Replenishment concept. Secure data transmission and confidentiality are preconditions for success. Logistics issues: Unlike CR the consumer often wont be at home during delivery and the concept of unattended delivery is therefore of great importance. There are open questions on the technical support for the handing over process, on suitable identification technologies as well as on integration of delivery boxes. Other issues concern accepted delivery frequency, OoS situations etc. Additional business issues: Due to the b2c character of Home Replenishment services open communication channels like the internet have to be used. Besides confidentiality and secure data transmission other security concepts like data integrity, authenticity and reliability are important. Last but not least there are formal and legal issues concerning the unattended delivery process. Innovative technologies like electronic tags might help to solve problems. One could say that Home Replenishment is the translation of the industrial Continuous Replenishment idea into a delivery concept for the interface between retailers outlets and consumers homes that is orientated towards individual consumers needs and takes special last mile requirements into account.
Potential Benefits of Home Replenishment a First Overview Compared to existing CDL services Home Replenishment offers additional benefits: The consumer defines maximum and minimum stock for the different replenishment products. The service provider is responsible for keeping the stock in the given range but it is his decision at what time and day the delivery takes place. Special optimising algorithms can guarantee a levelled (Klaus 1993) and cost efficient physical flow. Capacities of resources are more evenly used. The burden of boring and standard shopping trips (cf. Kmrinen 2000) is taken away from the consumer. He wins because he has more leisure time for much more interesting things like visiting cultural events, meeting friends or buying touch and feel products like clothes etc. On the other hand the retailer wins more loyal customers due to the outstanding increase in service quality.
The consumer gets more transparent to the service provider. Based on continuous and detailed consumption data the service provider is able to build up consumption profiles. This allows better planning processes, reduces OoS situations and opens up the opportunity to make some extra money acting as a test market for manufacturers and market research institutes.
The unattended delivery concept which has already tested but not really been accepted by the consumer in existing CDL operations for grocery products solves the problem of delivery times defined by the consumer. The planning of daily delivery tours gets much more easier. Due to the better usage of capacities the process costs for delivery can be significantly reduced.
The Home Replenishment concept might also solve the problem of supporting rural population with comprehensive CDL services at least partially. The delivery costs can be kept under control by choosing high level maximum stocks.
Framework for the Design of innovative Home Replenishment Services: ECommerce S model and Box of Alternatives E-Commerce S In Chapter 2 we mentioned that ECR can be described as the best known realisation of the Supply Chain Management concept. Therefore it seems reasonable to choose a model that has been already used in connection with SCM issues. In this context (Prockl 2001) refers especially to the Supply Chain Operations Reference Model (SCOR) that has been developed by the American Supply Chain Council and the Supply Chain S that has been introduced by (Klaus 1998). Due to reasons of complexity and practicability this paper is based on the S. The following figure shows the order-to-payment-process which is the nucleus of this model. The S can be easily seen on the right hand side.
Figure 1: Supply Chain S, Source: Klaus 1998
Procurement
Forecasting and Production Planning
Order Processing
Materials Handling
Production and Distribution
Physical Fulfillment
Payment
The generic model describes the order-to-payment process inside a company and can be used and adapted to all types of enterprises in a value chain. It was successfully adapted to b2c e-commerce processes. The result is presented in figure 2. The figure shows the four different generic flows that are important for the discussion concerning Consumer Direct Logistics issues: (1) the information flow, containing additional stimulation processes, (2) the physical fulfilment flow, (3) the reverse flow and (4) the payment flow. The process steps highlighted by the grey box as a whole can be understood as the CDL operation. Figure 2: E-Commerce S Model, Source: Fraunhofer/ECR Europe 2002
Procurement
Forecast and Production Planning
Information Flow
(Stimulation)
Materials Handling
Production and Distribution
Physical Fulfilment Flow
Payment Flow
Return Flow
Table 1 describes the different process steps on a more detailed level. Table 1: Process Steps and activities, Source: Fraunhofer/ECR Europe 2002
Process Level 1 Information Flow Need Stimulation Process Level 2 Consumer needs are stimulated using different media. Printed catalogues and complex automatic replenishment systems based on innovative IT-technologies limit a huge variety of marketing tools on both sides of the spectrum. Order Entry The order is received by the Consumer Direct L ogistics provider. Call centres as well as Internet connections are used. Order Processing Order processing includes checks concerning Explanation
creditworthiness of consumer, plausibility of order etc. Consumer profiles are generated, cross checks are carried out to create consumer specific offers.
Order Assignment
The order gets released for physical fulfilment. Additional information is given to manufacturers or other partners upstream the Supply Chain. E.g. supply chain software can be used for assistance.
Physical Flow
Picking Packing
and The order is normally picked in dedicated warehouses and/or shops using mobile IT-equipment. There are different possibilities for packing picked items. Some companies use normal postal packages, others use bag-in-box systems, etc.
Merging
Partial deliveries which have been picked and packed in different warehouse or shop zones need to be merged before they are delivered to the consumer. The same applies to deliveries coming from other sources. The merging process often takes place directly in front of the consumers door.
Last Mile
The goods are delivered to the consumer. Different locations like the front door of the consumers house, the office or other places frequently passed by are used. In some cases the consumer has to be at home, in others he does not.
Point of Use Depending on the type of product different point of use Service services can be offered. Sometimes, for example, the driver places the delivered goods into the storage room of the consumer.
Reverse Flow
Receiving
If the quality or quantity of the goods delivered is not in order, somebody has to take back the products. The same applies for special services like empties, repairs or dry cleaning.
Inspection
The
received
goods
are
inspected
by
retailers,
manufacturers or special service providers. It has to be decided, whether the consumer gets a refund and what is to be done with returned items. Reconditionin The g inspected goods have to be refined or
reconditioned and repacked. In some cases, e.g. dry cleaning, the items collected at different consumers are bundled and given to a specialist.
Restocking
After the inspection, the reconditioned and repacked products and items can be restocked in
warehouses/shops or, in case of items that belong to dedicated consumers, buffered in a designated zone. Payment Flow Invoice An invoice is sent to the consumer by the Consumer Direct Logistics Service provider. This process step is not necessary if credit cards or other prepaid
mechanisms are used or if the consumer pays in cash. Remittance If the consumer did not pay in cash during delivery or in advance he has to transfer the money using standard remittance processes. Payment Processing The underlying payment processing, the funding and refunding is normally done by financial institutions.
The advantages of the model which are described in Fraunhofer/ECR Europe (2002) show that the e-commerce S is a suitable instrument for analysis of existing and design of future CDL operations. Zwickys Box of Alternatives A Generator for New Service Concepts The S-model is just one part of the framework that can be used for development of new Consumer Direct Logistics services. The second and not less important part is the concept of the morphologic box of alternatives that has been introduced by (Zwicky 1966). A short explanation of this concept might be appropriate here: The morphologic box represents a method to find solutions for complex design problems. In a first step partial design questions and potential answers are identified and summarized in a table. In the second step different solutions of the complex design problem are generated by combining single solutions of the partial design questions. The resulting solutions of the total problem are t en evaluated using feasibility and h practicability as main criteria. Remaining combinations can be realised at the end of the proceeding. During the Fraunhofer study on CDL operations in Europe that has been referred to earlier in the text more than thirty partial design questions have been identified along the generic process model that has been described in the last section of the text (Fraunhofer/ECR Europe 2002). Due to the fact that the number of pages is limited for this paper it wont be a good idea to present and discuss all of them. Therefore the morphologic box in figure 3 comprises only the more important design questions that are relevant for the design of a Home Replenishment service. To keep it simple we abstained from assigning design issues to the process steps of the S. The alternatives marked in dark grey have been chosen for the HORN (Home and Office Replenishment Nuremberg) project that is subject of the next and last chapter.
Figure 3: Morphologic Box of Alternatives for Home Replenishment Operations

Design Issue Products offered Medium stimulation Consumer interface Identification technology Security technology Picking packing location Area operation Point delivery of Pick store up at Intermediate locations Office delivery Attended home delivery Delivery time Inspection Defined provider by Next plus day Next day, Same day Unattended home delivery Less than of Local Regional National International and Design Alternatives Packaged dry goods Fresh/chilled/frozen (normal handling) for Printed Catalogue Personal Voice Additional
items (special handling) services com- World Web phone with Pocket ID-Module Two-dimensional Electronic Barcode Digital signature Central tags Digital certificates fulfilment PC with Wide WAP Product
munication
Computer Mobile
with ID-Module Plain writing Personal ID-number Retail outlet
ID-Module Classical Barcode Smartcard
centre of home delivery service
time definite
two hours
of Done by the customer using the Automatic inspection using tags and home delivery box
goods delivered consumer interface
A Comprehensive and Totally New Approach: Home and Office Replenishment Nuremberg Basic Concept The Home and Office Replenishment service in Nuremberg supplies consumers with dry packaged and fast moving consumer goods. The consumer buys his stock of products to be replenished once at the beginning of the service process and defines
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maximum and minimum stock as well as the medium range for each product using a Pocket PC that is equipped with an integrated barcode scanner and an additional DECT module that provides the connection to the service providers data base via ISDN and internet. After consumption of a product the EAN article number that is printed on the product package is scanned with the same handheld and a message is sent automatically to the service provider using absolutely secure communication lines. Here the consumption messages are gathered and stored in a data base. Once each day a special decision support software algorithm that takes various system and customer specific restrictions into account checks the data base and generates picking & packing orders and shopping lists that are sent to a professional shopper who is also equipped with a wireless pocket PC with integrated GSM module and barcode scanner. The shopping is done, products are paid and packed into transport boxes, carried to the consumer and put into delivery boxes for unattended delivery. The consumer is supported with an SMS on his mobile phone that contains dispatch information and an electronic bill of delivery that is sent to his wireless Pocket PC. After taking out the items the delivery is accepted or not, an acknowledgement of receipt is sent back to the service provider who then initiates the invoice. Goals of the Project Primary goal is to improve the competitiveness of home delivery services that deliver consumer goods for the daily needs. Especially the potential of innovative mobile ecommerce techniques and modern logistical replenishment concepts are to be used at the interface to the consumer. Even though these are not practiced today, they have after preliminary examination proven to offer a considerable amount of problem solving potential. In detail there are five different goals to be achieved: 1) Research into the phenomenon home delivery service and development of a generator for innovative CDL services, 2) Usage of this service generator for the development of a fundamental Home and Office Replenishment, 3) Development of the hard- and software needed for the realization of the HORN concept, 3) Development and implementation of a generic security concept for confidential, reliable and authentic data communication and 4) Carrying out of a pilot trial in the area of ErlangenNuremberg and evaluation of the underlying service concept from an economic point of view. Some first results and insights are presented in the next section of the paper.
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State of the Project and first Insights The first two goals of the project have been achieved by now. Results of research into the phenomenon Home Delivery Services have already been published in the study Consumer Direct Logistics (Fraunhofer/ECR Europe 2002). At the moment the project team is busy with the development of hardware and application software that is needed for the pilot trial in Nuremberg. Apart from that there are first interesting insights concerning potential benefits, IT, marketing and consumer behaviour. Home Replenishment does not change or optimise single steps of the order to payment process in CDL. The concept is a coordination and integration instrument that optimises the process as a whole. Therefore it is difficult to estimate cost effects in advance. Only the pilot trial which will start in spring next year and its evaluation allow estimations on cost savings. Some aspects make quite clear that the technical support of the concept is absolutely critical. E.g. available product information doesnt provide all the information that is necessary for optimisation of capacity usage. Information on dimensions and composition of a product ore often missing. Only a totally automated handing over process between service provider and consumer is formally and legally safe. Unfortunately the necessary technology, electronic tags, is much to expensive to be used today. Other solutions have to be found. Common product categories are not valid in a Home Replenishment concept. It is irrelevant whether a product is dry and packaged, fresh or frozen. Products have to be divided up into touch and feel products and specialties like salad or fruits (the products you can buy at the Wochenmarkt) and standard replenishment products like milk in tetra-packs, frozen pizza, kidney beans in tin cans, cats food and other product you normally have in your larder. The consumers psyche has to be taken into account thoroughly. If the usage of hard- and software is too complex and if the system is not absolutely fool proved the service wont last for long. The private user is not very disciplined and you can take it for granted that the consumer forgets to scan after consumption at least once or twice a day. The system needs to cope with that.
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Conclusion The paper answers the question how the CR principle could be adapted for the last mile of consumer goods distribution. It presents a theoretical framework for design, a tool for generation of innovative solutions and some first results of an ongoing R&D project in Germany. At the end it is quite clear that there is a need for new solutions, that the adaptation of CR to last mile requirements is a possible solution that promises various additional benefits. There are models and methods for a comprehensive design and there are also first ideas how a Home Replenishment systems could look like. Whether the promised benefits can really be achieved has to be proven. Bibliography Fraunhofer AVK, ECR Europe (2002), Consumer Direct Logistics, published by ECR Europe and Fraunhofer AVK, Brssel/Nrnberg Kmrinen, V. (2000) Supply Chain for e-Commerce and Home Delivery in the Food Industry. at: http://www.tuta.hut.fi/ecomlog/texts/cies_berlin.html (18.03.2002) Klaus, P. (1993), Die dritte Bedeutung der Logistik, Nrnberger LogistikArbeitspapiere, Nr.3 Klaus, P. (1998), Supply Chain Management, in: Klaus, P., Krieger, W. (1998), Gabler Logistik Lexikon, 1st edition, Gabler, Wiesbaden, p. 434-440 Prockl, G. (2001), SCM als Gestaltung berbetrieblicher Versorgungsnetze eine Verdichtung von Prinzipien zur Strukturation und Anstze zur theoretischen Hinterfragung, Edition Logistik, Band 2, DVZ-Verlag, Hamburg Prockl, G., Wilhelm, M. (2002), Smart Practices in Consumer Direct Logistics, conference proceedings, NOFOMA 2002 Zwicky, F. (1966) Entdecken, Erfinden, Forschen im Morphologischen Weltbild, 2nd edition, Baeschlin/Glarus Abbreviations CDL: Consumer Direct Logistics CR: Continuous Replenishment DECT: Digital European Telephony EAN: European Article Numbering
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ECR: Efficient Consumer Response FMCG: Fast Moving Consumer Goods GSM: Global System of Mobile Communication ISDN: Integrated Services Digital Network OoS: Out of Stock R&D: Research and Development SMS: Short Message Service
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Grosery and FMCG

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Les Quatrimes Rencontres Internacionales de la Recherche en Logistique Fourth International Meeting for Research in logistics

Figure 1: Supply Chain S, Source: Klaus 1998

Forecasting and Production Planning

Production and Distribution

Forecast and Production Planning

Production and Distribution

Physical Fulfilment Flow

Figure 3: Morphologic Box of Alternatives for Home Replenishment Operations

with ID-Module Plain writing Personal ID-number Retail outlet

ID-Module Classical Barcode Smartcard

centre of home delivery service

goods delivered consumer interface

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