Analysis: Finding the distribution centres of the future

The growth of multichannel is putting pressure on retailers’ distribution centres, and businesses are finding there is little alternative but to adapt and modernise or face losing out to those that do.

Distribution centres no doubt felt that strain at Christmas, when a record-breaking 107 million consumers visited retail websites on Christmas Day, showed figures released by data firm Experian.

Marks & Spencer head of logistics Emile Naus says the retailer has had to adapt the way it operates in line with changing customer habits.

He says: “They are shopping across more channels - from mobiles to in-store ordering points. However, they only see it as one M&S brand so we have to make sure we’re joined up across all our channels and that we’re delivering to the same high standard whichever way they chose to shop with us.”

Distribution centres have always had a central role in operational efficiency but, with new processes such as
warehouse management systems and, in some cases, automation brought in to help reduce operating costs, investment in existing and new distribution centres is increasingly required.

Dino Rocos, operations director of department store group John Lewis, agrees. “Looking forward, these imperatives remain. However, the role of distribution centres within the modern retail environment has developed hugely over recent years with them playing a key role in the delivery of multichannel trading propositions.

“The ability to differentiate through speed without losing efficiency, the requirement to introduce new service propositions and the need to manage disparate trading propositions within a single operating model is key.”

John Lewis began planning for multichannel back in 2003, and opened its semi-automated national data centre at Magna Park in Milton Keynes in 2009. Supporting about 50,000 orders a day, the premises measures 8.8 million sq ft, and has required an investment approaching £100m.

“Never before have distribution centres sat so squarely at the heart of successful retailing,” says Rocos. “As
a result we see a growth in the level of investment in new technologies, not only within the distribution centres
but in the delivery of more holistic business-wide supply chain strategies. Distribution centres no longer stand
on their own but form part of a complex infrastructure that both supports the customer experience and drives operating profit.”

Upping its game

Since 2005, the Co-operative Food has invested more than £200m in upgrading its food distribution network, carrying out a programme, which it has termed LIDIA (Logistics Infrastructure Development to Improve Availability).

Mark Leonard, head of logistics service at Co-operative Food, says its distribution centres were outdated and suffered from chronic over-capacity, unable to “offer us the opportunity to optimise transport and service
to our stores through multi-temperature composite deliveries”. He adds that the retailer also used paper-based
warehouse systems that led to poor pick-accuracy.

“LIDIA has changed all this,” he says. “By the end of 2013 our network transformation will be complete. We will have closed 21 sites and have a network consisting of one national distribution centre for slow moving
grocery lines, eight multi-temperature composite distribution centres (CDC) and three local service centres.”

As part of LIDIA, the retailer has upgraded its warehouse and transport execution systems with voice picking software from Manhattan Associates’ WMS, which enables the business to improve warehouse efficiency. A Microlise Transport Execution system allows it to track vehicles, while reducing the number of deliveries to stores because its new multi-temperature warehouses enable it to deliver all categories of product in one vehicle. The retailer is also rolling out software firm C3’s Yard Management system and its Goods Receiving programmes.

“Our aim is to control all vehicles and stock into and out of our sites via these integrated systems,” says Leonard. It is early days but we have already rolled the Yard Management system into three of our new CDCs
and the goods-in system goes live in February 2013.”

Meanwhile, the final phase of the Co-operative Food’s logistics network overhaul took place in December, and the new £22m distribution centre in North Derbyshire is expected to be fully operational by September.

Leonard says the new network has the capacity needed to support our business growth. He adds: “It has also allowed us to optimise our distribution network and reduce stem mileage [the mileage to and from a delivery zone] significantly. Above all else it has allowed us to offer a fantastic service to our stores and has the technology and capacity to offer the sort of flexibility required for the convenience market,” says Leonard.

Similarly, M&S has invested in a new 900,000 sq ft ecommerce distribution centre in Castle Donington, expected to open early this year. The 82 ft-high facility is fully mechanised and features the latest in warehousing technology, from automated storage and retrieval systems to sophisticated warehouse management systems that guarantee delivery accuracy.

Managing expectations

Naus says retailers are competing to offer the quickest and most convenient order and delivery options, which means that they have to be able to manage the increasing expectations of customers. He says: “This drives a
fundamental change in terms of service level requirements, even for very small orders, and there is an expectation to pick, pack and dispatch quickly and accurately. As a result we expect to see greater levels of automation within distribution centres.”

As well as increased levels of automation, many are moving towards third-party logistics providers, which can be less costly and more flexible. In October, logistics firm Clipper opened a shared distribution centre at Wynyard Park on Teesside, with George at Asda as its anchor tenant. The 342,000 sq ft facility is 70% occupied by George and will handle almost all of the supermarket brand’s clothing stock. As well as being close to Teesport, where the majority of George’s clothing docks into the UK, the centre has been designed to meet the demands of multichannel retailing and is able to process 3 million items of clothing a week.

Clipper managing director Tony Mannix expects more retailers to head in this direction. “I think you’ll see a lot more shared user facilities, owned and operated by third-party logistics providers (3PLs).”

He says: “If you think about it, it really makes business sense to spread the cost, and therefore the risk, across
a number of parties.” He adds: “The model can also allow businesses of all sizes to access best-in-class
facilities.” This also gives the flexibility to deal with unknown scenarios, in what is [the] notoriously volatile business of retail.”

Mannix says today retailers expect value-added, pre-retail services such as labelling and pricing of products, as well as steaming and pressing to reduce the end cost for the retailer. “The growth of multichannel has an even greater need for agility, coupled with the ability to take time and cost out of supply chain,” he observes. “To do that well you need to be an efficient one stop shop covering all aspects of multichannel retail.”

David Scott, head of warehouse and distribution at logistics provider Torque, agrees. “As retailers continue to move into multichannel their needs change and the distribution centre - which typically shipped bulk orders
- has to change to accommodate a broader range of services at a much lower order/activity level.”

So the distribution centre of the future will have to become more agile and able to service multiple deliveries around the clock. Rocos says this will be unavoidable: “The future success of retailers will be hugely dependent on the delivery of supply chain excellence.” Those that fail to recognise this could find themselves behind the curve and compromising their future.