Internal, vertical and horizontal logistics integration in Italian grocery distribution.

Introduction

The concept of integrated logistics was introduced some years ago, at first referring to the different phases of the business operational cycle and to the different functions which allow it to be carried out[1-5], and later, even more frequently referring to the whole channel between production and consumption and to the relationship of physical and information exchange between the institutions of the channel[6-9]. This theme assumed great importance in grocery distribution where logistics costs represent a considerable part of the total interface costs between manufacturing industry and commercial enterprises; in particular in Italy (logistics costs in the grocery sector, in Italy, are about L25,000 billion) they reach about 50 per cent[10,11].

A clear commitment to finding solutions to increase operating efficiency in the logistics channel can therefore be observed in both business theory and practice (in Italy, after a similar experience in USA, a programme of collaboration between branded product industry and large-scale trade businesses, called efficient consumer response (ECR) has been started. The aim is a global and integrated re-engineering of grocery distribution channel)[12-15]. This commitment can be distinguished within the distribution channel as a whole[16-19], in relation to the type of flows which proceed in it, to the functions carried out, and to the institutions which put them into effect.

Channel distribution logistics concerns, by definition, physical flow and the flow of information from producer to final consumer. In order to guarantee these flows, several activities have to be carried out inside the channel in a co-ordinated way.

These activities can be summarized in six main functions[20-23]:

(1) order management, which ensures the connection between product demand and supply through all institutions of the channel;

(2) inventory management and control, which guarantees product availability in different interchange nodes along the channel;

(3) warehousing, that is keeping products until they are transferred physically to another institution or place;

(4) material handling, which concerns all activities connected with internal movement of products from receipt to dispatch;

(5) packaging and unitization, which involves putting together products in suitable units for storing, handling and transferring; and

(6) transport, which concerns the physical movement of goods from point of origin to point of consumption.

On the basis of the features of the sector and of the choices adopted, these functions can be carried out by different institutions [ILLUSTRATION FOR FIGURE 1 OMITTED]: producer, agent, distributor, logistics service supplier and consumer.

In particular, in this paper, analysis has been focused on two of the main institutions of the grocery distribution channel: the branded product industry and large-scale trade.

Referring to these institutions, logistics integration areas are analysed, within each business (internal integration), between businesses located at different stages of the channel (vertical integration), and between different businesses located on the same level of the channel (horizontal integration), in order to identify some organizational and managerial solutions for improving interfunctional and interorganizational co-ordination[24]. Internal and horizontal integration are the requirements for vertical integration to produce important synergies for the institutions which adopt it.

Integrated logistics in the branded products industry

The importance of integration between logistics activities within industrial concerns, about 20 years after the first studies were carried out on this subject[25-27], is now generally recognized, not only by academics but also by high level management. Businesses, however, adopt solutions very different from one another both for the level of integration, partial or total, and for the modalities with which the integration is reached, through the use of computer based systems, of communication networks and through choices related to business organization[28-32].

Referring to the branded industry organization chart, logistics management, if present with this name, whatever its position within the organizational structure may be, always supervises distribution activities management, sometimes associates it with production planning and in only a few cases also manages purchasing. In other words, in this sector, the complexity of logistics processes lies especially in managing the post-production phases, from product storing in central warehouses and subsequent transit to local warehouses, to transport and final delivery to customer. As a consequence, logistics organization is typically distribution oriented. Apart from the interdependencies, in materials management, between purchasing and production, the analysis, within this paper, will be focused on physical distribution activities and their relationship with production planning.

The main responsibilities for distribution logistics concern operational and strategic decisions[33,34] connected with the management of customer orders, finished product stocks, central and local warehouses, transit-points, primary and secondary transport, goods packaging and unitization. Industries do not always decide to carry out all these activities with internal resources, so sometimes they prefer to entrust some of them to external businesses specializing in logistics services. Delegation to a third party[35] almost always concerns primary and secondary transport, often local warehouses and transit-point management and only in a few cases the whole distribution process. Whatever choice is made about the degree of decentralization of physical distribution functions, logistics requires that industrial concerns have to establish the contractual aspects of the relationship with external institutions, to control performances and operationally to co-ordinate interface activities. Furthermore it has to supervize inventory management activities and product handling in the service supplier's warehouse.

With reference to the distribution process, what follows is an analysis, for each main logistics function, of technological and managerial solutions which enhance integration between persons, business functions, procedures, and central and local structures within the branded product industry (Table I). In particular referring to order management and inventory management, advantages gained from the use of computer-based information systems management are considered. Similarly with reference to warehousing and handling, interventions of automation in managing physical flows within central warehouses are identified. As regards packaging and unitization, [TABULAR DATA FOR TABLE I OMITTED] industrial concerns have to face the difficulty of reconciling the opposite needs of differentiated load units with the adoption of a computer-based palletization system. Finally, referring to transport, the proposed solutions aim at the optimal use of means of transport by ensuring full loads on return journeys.

Computer-based order-management systems in the branded product industry

The order cycle for branded industry is strongly conditioned by the internal processes of order management and processing which start with data entry (in the computer system), and by product masters controls, by commercial conditions, by overdraft facilities and by the availability of products, and end when picking lists are printed. At present the mean time of delivery of Italian producers is about six days and three of them are spent in order processing which has to get through a series of verifications, controls and reworking before being definitively sent. Adopting lean procedures and reducing the number of errors can result in a considerable reduction in administrative time. The reduction of errors during the order acquisition phase is the first prerequisite to speed up the whole process.

Leaving aside for the moment direct order acquisition from customer, subsequently analysed with reference to vertical integration, in the case of order acquisition through salesmen (at present in Italy about 70 per cent of orders of branded industry are filled by salespeople), the use of two-way terminals allows on line verification of the accuracy and of the correspondence with the agreed conditions, and furthermore it eliminates data entry and control by hand. A second prerequisite is the computer-based and integrated management of controls carried out concurrently with the order cycle[36]. The system has to have the capacity to recognize authorized interventions, and likewise the responsibility for the decision to release has to be entrusted on the operational level to persons with skills in the whole process of order dispatching.

Inventory management systems and organizational liaison devices

Finished product inventory management is the activity which connects the logistics of distribution and the logistics of manufacturing in branded industry. The first fixes target stocks for each reference and it periodically signals variances and possible requirements; the second, starting from these data, prearranges medium-term production planning and it updates short-term schedules in order to reconcile market needs with resource availability and production efficiency[37]. Whether these two sub-functions are part of the same function or they are under different functions, the integration process is carried out through continuous information exchange and through formal meetings or committees. The knowledge in real time of global stock for each product, with sales forecasts and order backlogs allows for the prearrangement and updating of production plans. Information about stock size of each local warehouse and the related order backlogs …