Going shopping, whether it be to the high street, retail park, shopping centre or online, is an activity loved by some, loathed by others and tolerated as a necessary evil by everyone else. No matter how we go about buying our food, clothing and homewares, few give much consideration to how these products actually make their way to the shelves ready to be bought.
That is testament to the ability of the logistics industry to carry out a series of complex inter-connected manoeuvres to ensure your local supermarket does not run out of the most sought-after items, that your service station has enough petrol in its tanks when your car needs refuelling and your favourite clothes shop has the latest fashions in your size.
Logistics is what some prefer to call the transport industry, but it is about much more than lorries, ships and planes. By one measure, the logistics sector in Britain employs some 2.3 million people across almost 200,000 companies and is worth more than £93 billion to the economy. While some companies prefer to run their own operations in-house, the trend in recent years has been to outsource them to the dozens of logistics companies doing business in the UK.
Coolin Desai, UK head of transport and logistics at PwC, divides the sector in two: contract logistics and parcels. The former has faced challenges since the credit crunch struck in the form of reduced demand, rising costs and customers wanting more for their money. However, he says the rise of online shopping has brought a new set of issues for parcels operators such as Yodel, DPD, TNT and Parcelforce.
E-commerce has become a big battleground for logistics companies that serve the consumer as they vie for a bigger share of the market, Mr Desai says. Shoppers want the option of collecting a purchase from a store, having it delivered to their home or getting it sent to a third-party location, such as a locker at a railway station. “This introduces massive complexity for a retailer that was historically sending most stock to its stores. Now there is a fragmentation of volumes and the number of destinations they must be sent to,” he explains.
It also raises the question of how a retailer can offer the customer the choice of delivery options without a variety of charging models. However, Mr Desai says that some companies are happy to offer “click and collect” for free, while charging for delivery. “There’s an interesting dialogue going on between customer, retailer and transport provider as to how to share the costs – and the profits.”
E-commerce has become a big battleground for logistics companies that serve the consumer as they vie for a bigger share of the market
One result could be offering a rising number of collection points in places with high footfall. Amazon has experimented with lockers in shopping centres and outside office buildings in central London, as well as floating the idea of installing more in Tube station ticket offices as they are closed over the next few years. Although the idea is popular with retailers and logistics operators alike because it allows multiple orders to be delivered to one location, Mr Desai sounds a warning: “While it will serve a need, I don’t think it will become universal because many people do not want to travel somewhere inconvenient to collect a parcel,” he says.
The challenge facing all players in the sector is keeping pace with rapidly changing consumer behaviour. Even those who have found a way to make their logistics operations pay cannot afford to relax. “You can’t assume that what you are doing today is going to be fit for purpose in two or three years’ time,” Mr Desai says.
The drive to future-proof operations as much as possible has resulted in some creative thinking. Knowing that delivering online grocery orders has been a loss-making activity for the likes of Tesco and Sainsbury’s, despite being an offer that consumers now expect of a big supermarket, Morrisons has taken a radical approach to its problem. Rather than setting up an operation from scratch, it announced last May that Ocado would process Morrisons’ customer orders from its Midlands operations centre, allowing the supermarket to “enter the online grocery market quickly with a profitable business model”. The fate of Morrisons’ somewhat belated experiment will be very closely watched by its rivals.
Retailers like supermarkets and other big chains that have thousands of stores across the country to keep stocked rely on suppliers to deliver their goods to warehouses on schedule. A considerable amount of this freight is brought to Britain by sea and processed through ports such as Felixstowe and Southampton. The vessels that ply the trade routes between Europe and Asia have been growing considerably larger in recent years and a new generation of super container ship will start sailing this year. The Triple E class, 400 metres long, 59 metres wide and 73 metres high, is capable of carrying 18,000 containers 20ft in length. Because they have been designed for maximum efficiency, the Triple E ships will travel more slowly and use less fuel despite carrying 16 per cent more cargo than their largest predecessors.
A new $2-billion deep-water port called London Gateway at Thurrock in Essex has been being built by Dubai’s DP World that is capable of handling these record-breaking ships. Peter Ward, the port’s cargo supply chain commercial manager, says the key difference is its proximity – 20 miles down the Thames from London – to millions of consumers. The facility is also next to land on which Europe’s largest logistics park will be built. This means, rather than transporting containers by road to warehouses many miles away, retailers will be able to process their contents on-site with a potential saving of up to £500 per unit.
Driving down logistics costs is essential for retailers, Mr Ward says, because manufacturers in countries such as China are now less willing to always fulfil European orders at the same price, volume and time scale as even five years ago as their domestic market continues to expand apace. “It’s putting quite a lot of stress and strain on the retailers; the dynamics of some supply chains that have been designed around economies of scale are changing and calling for more flexibility,” he says.
DP World believes that some retailers will use capacity at London Gateway to meet rising demand for next-day delivery for online orders. Mr Ward argues that having a small number of warehouses, serving both a national store network and a rapidly expanding e-commerce operation, will not be sustainable for many companies. Marks & Spencer is the first customer for the logistics park and will start building a 950,000-sq-ft distribution centre this year that is due to open in 2016.
While changing economics is resulting in some manufacturing returning to Britain and other Western countries from the Far East, Mr Ward says that the volume of global trade is set to continue rising as countries in Latin America and Africa expand their output. “What we’re seeing is some shifts from China to places like Cambodia and the Indian sub-continent, but there will still be lower-cost manufacturing locations outside the UK and Europe in the future,” he concludes.
