CEIBS
Port of Barcelona Logistics Chair
Port of Barcelona Logistics Chair
Direct-to-store distribution
Impact on European Ports
Final Report
October, 2008
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Port of Barcelona Logistics Chair
INDEX
1.
Introduction
1.1. Objectives and scope of the research
1.2. Methodology
2.
Global context
2.1. European Distribution strategies: historic view
2.2. Changes upstream
2.3. Changes downstream
2.4. Offshoring Logistics to China
3.
Components of direct-to-store programs
3.1. Introduction
3.2. Upstream components
3.3. Downstream components
3.4. Major benefits
4.
Implementation of direct-to-store programs
4.1. Building direct-to-store containers at origin
4.2. DC bypass strategies
4.3. Direct-to-store programs requirements
4.4. Current success implementations
4.5. Benefits of direct-to-store programs
4.6. Major challenges
5.
Case-studies
6.
Impact on the Logistic chain
6.1. Impact on distribution networks at destination
6.2. Impact on maritime transportation
7.
Conclusions
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Port of Barcelona Logistics Chair
1. Introduction
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Port of Barcelona Logistics Chair
1. Introduction
1.1. Objectives and scope of the research

In the last years retailers and manufacturers from several industries have implemented a supply chain solution based on building
in China direct-to-store containers. Consolidating cargo and performing specialized value added logistic services at origin in
order to build direct-to-store containers, reduce or even eliminate operations at destination creating a cost advantage. Shipments
can move from origin straight to end-customers or to local or regional distribution centers, bypassing continental distribution
centers located in Northern Europe.
The purpose of this research is to introduce direct-to-store distribution, while examining the context of greater significance in
which it is being implemented. This context starts with the current trend among companies to offshore logistics to sourcing
countries in Asia, and in particular to China, and reaches companies new distribution strategies at cargo destination, in which the
bypass of the traditional continental distribution center is a major component. The research also seeks to identify the major
effects that the described scenario and the further growth of direct-to-store programs will have on European distribution networks
and on European ports.
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Port of Barcelona Logistics Chair
1. Introduction
1.2. Methodology
In order to achieve these results, both a qualitative and quantitative research have been accomplished.
-
Personal in-depth interviews were conducted with industry experts, shippers, logistic service providers and transport
operators.
-
An expert workshop session with representatives of all supply chain stakeholders was held to discuss key issues and
hands-on experience on direct-to-store models.
-
Secondary research has been undertaken to analyze distribution strategies implemented by companies sourcing from or
manufacturing in China.
-
Attendance to related conferences to gather feed-back from shippers and transport and logistic operators about directto-store distribution.
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Port of Barcelona Logistics Chair
2. Global context
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2. Global context
Port of Barcelona Logistics Chair
2.1. European distribution strategies: historic view
Distribution strategies vary considerably for different industry sectors and companies. However, in the last thirty years there has been a
common evolution in how companies have configured their supply chain structures to serve the European market.
Decentralized distribution structure:
Before European Union establishment companies use to have a decentralize set-up, relying on a national distribution center in each major
country in which they were involved. Distribution centers main functions included consolidation, warehousing, inventory control, distribution
and other functions linked with handling freight. Sourcing was done mainly from manufacturing plants in Europe, and logistics strategy was
developed on a country-by-country basis.
Centralized distribution structure
Source: Buck Consultants
In the mid- 1990s, without internal borders within the European Union, companies developed
distribution strategies with a European focus. Many international companies closed their
national distribution center and moved their stock to a central distribution center, often located
in the Benelux area. These Pan-European distribution centers began serving the entire
Europe-wide customer base. Distribution centers also expanded their functions. The purpose of
the new functions was to provide value-added services to freight. Activities known as value
added logistics services such as customizing and localizing of products, adding components or
manuals, testing, quality control or final assembly were then performed at the distribution
center. Later on, more sophisticated high-end activities such as postponement manufacturing
were also added. For many, this centralized supply chain structure is still the most efficient way
to organize European distribution. The advantages of this model include savings on
transportation costs through optimization of inbound transport, efficient management and
control of stocks and costs savings through economies of scale. At this time too, global
sourcing started and companies begun to be more globally focused.
In the last years, driven by important changes occurred at both ends of supply chains, European distribution structures are evolving again
to adapt to a new global context.
Source of historic view: Buck consultants and article: Europe‟s Evolving Logistic landscape, www. inboundlogistics.com. August 2002.
Holland International Distribution Council. „‟European supply chain structures. The Netherlands as logistics gateway to Europe‟‟.
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2. Global context
Port of Barcelona Logistics Chair
2.2. Changes upstream
As international trade barriers diminish, global sourcing and production have become widespread. As a result, companies’ supply
chains have increasingly become longer, expanding across borders. China with its export driven economic growth has become the world
third major trader, just behind the EU-25 and the U.S., and is now the first EU-25 import partner and its second major trader partner.
Sourcing or manufacturing in China has become a common strategy for multinational companies and in general for companies from most
sectors and sizes looking for lower costs.
In order to mitigate risks, sourcing strategies have also increased the supplier base and its geographical dispersion. The search to
drive down sourcing costs have lead companies to diversify sourcing points and start linking their supply chain to countries in South East
Asia, India, Bangladesh or even Pakistan. As a result of these changes, longer and more complex supply chains have lead to increased
inventory holding and transportations costs.
For some sectors, sourcing in Asia is no longer a competitive advantage but a must to remain competitive. In this scenario, global supply
chain performance becomes critical and companies are forced to consider logistics as a core competence, seeking to improve
continuously efficiency and costs along the logistic chain.
Major EU-25 trading partners in 2006
Major EU-25 trading partners (Million Euros). 2002-2006
EU Imports
2006
2005
2004
2003
2002
World
1.348.317
1.182.484
1.032.206
940.347
941.885
China
191.342
158.481
127.463
105.389
89.610
%
14,2%
13,4%
12,3%
11,2%
9,5%
Source: Eurostat
Rank EU imports
from
World
1
China
2
USA
3
Russia
4
Norway
5
Japan
Source: Eurostat
Million
Euro
1.350.494
191.342
175.813
136.847
79.019
75.631
% world
100,0
14,2
13,0
10,1
5,9
5,6
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Port of Barcelona Logistics Chair
2. Global context
2.3. Changes downstream
Downstream the supply chain, the emergence of new markets in Eastern Europe, Russia and the Middle East, where future growth is
perceived to be, is forcing companies to redesign the traditional way in which to supply their markets. Centralized distribution from a
continental distribution center located in the Benelux area may require products to cover great distances, leading to high transportation
costs. Moreover, new markets to service or sales growth are putting strain on current European distribution networks. When considering
expanding their facilities in Europe, companies often face a lack of available space, or are confronted to the high land prices.
Servicing new markets farther located and more scattered from remote sourcing areas seem to be favoring, as soon as volumes allow it,
the set up of more regional distribution structures. Companies choose to supply different regions through regional multi-country
distribution centers or particular countries through national or local distribution centers.
However, simultaneously, supply chains in Europe are evolving to become more product- and/or channel-specific in order to adapt to
different customer and product service level requirements. Therefore, companies may choose today to rely on both centralized and
decentralized distribution facilities for different products or channels.
Results of Transport Intelligence Global Distribution Strategies Survey 2008
-Three quarters of companies had re-structured their distribution network in the last year.
-In almost a fifth of cases the distribution re-structuring had involved relocating distribution centers to a lower cost country.
-The reasons behind this were predominantly related to cost with over 50% of respondents citing this as the main factor.
-When asked in what way their distribution networks were changing, the majority of respondents (58%) indicated that they
were establishing more regional (multi-country) distribution hubs.
Source: Transport Intelligence Global Distribution Strategies Survey 2008
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2. Global context
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2.4. Offshoring logistics to China
To respond to the increasing complexity of managing more and farther located suppliers while servicing more scattered markets,
companies have realized the opportunity to move logistics operations to low cost-countries and centralize the distribution directly
from origin. Labor-intensive logistics activities are increasingly being performed at lower cost locations by suppliers themselves or by
logistics service providers. Sourcing consolidation platforms operated by third party providers are taking the role of traditional distribution
centers. Companies have taken a step forward by offshoring logistics to China (or to other manufacturing hubs in Asia).
The traditional role of continental distribution centers is now played by consolidation platforms located at origin.
Labor intensive value added logistic activities such as pick and pack are now performed in China and distribution to
worldwide customers is organized from there.
Asia
Offshoring logistics to China
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3. Emergence of Direct-to-store distribution
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3. Emergence of Direct-to-store
Port of Barcelona Logistics Chair
3.1. Introduction
In this global context, companies are putting in place a new model of distribution, based on direct shipments from origin to store or
customer bypassing the traditional continental distribution center in Europe. Named as direct-to-store or DC bypass, it relies on:
•
At the upstream part of the supply chain, direct-to-store takes advantage of the sourcing consolidation platforms located in
China, where goods are consolidated, prepared store- or customer-ready and from there shipped to its final destination.
•
At the downstream part of the supply chain, shipments bypass the traditional continental distribution center and supported by
cross-docking, reach directly the final destination, which can be a local or regional distribution center or even a store.
Destination countries
Origin country (CHINA)
Offshoring logistics
DC bypass strategies
Direct shipment to
customer
More regionalized
distribution
Direct-to-store
distribution
Cargo Consolidation from
China (and from other
Asian sourcing countries)
Value added logistics
activities
Multi-country distribution
Velocity based networks
using cross-docking
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3. Emergence of direct-to-store
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Traditional centralized European distribution
Asia
Europe
Direct-to-store distribution
Asia
Suppliers
Europe
Suppliers
Consolidation
platform
Continental DC
Deconsolidation centers or
Regional DC
Multiple
inbound
flows
Origin
Transit
Destination
Customer DC
Suppliers
Owned store/
Customer’s store
Continental DC
Origin
Transit
Destination
Customer DC
Suppliers
Consolidation
platform
Deconsolidation
center
Owned store/
Customer’s store
Regional or local DC
Customers
Re-export flows
Origin
•Sourcing
Destination
•Consolidation at continental DC in Europe.
•Single entry point to Europe.
•Value added logistics services are
performed at destination. Product is
allocated and made store- or customer
ready at the continental DC in Europe.
•Centralized distribution through a continental
DC in Northern Europe.
•Re-export flows to third countries.
Origin
•Sourcing and consolidation at origin at
a consolidation platform operated by a
3PL.
•Value added logistics services are
performed at origin. Product is made
store- or customer ready by the
supplier or by the 3PL at the
consolidation platform at origin.
•Multi-country distribution from origin.
Destination
•Regionalized distribution (multi-country,
national or local). May be supported by
deconsolidation centers operated by 3PL
or in-house, located close to ports of
entry.
•Multi-entry points to Europe.
•No re-export flows.
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Port of Barcelona Logistics Chair
3. Emergence of Direct-to-store
3.2. Upstream components
(Multi) Country consolidation centers
As mentioned earlier, at the upstream part of the supply chain, direct-to-store distribution relies on sourcing consolidation platforms located
in China. With a dramatic increase in products being sourced from Asia and an increased supplier base, companies identified significant
opportunities to improve control and efficiency in the sourcing process and in the transport organization by setting up consolidation
platforms located in China and operated by third party logistics service providers (3PL). Through these platforms:
–
Companies consolidate cargo from different suppliers within China or coming in from different countries within the sourcing
region. The operations of consolidation provide more flexibility to companies in the volumes purchased to suppliers and
provide a better control of the flow of goods coming from suppliers located in remote areas.
–
Vendors management is a common service performed by 3PL at the consolidation platforms. When companies have a large
number of suppliers, 3PLs can monitor suppliers’ production, manage logistics assuring a timely delivery to the platform.
–
Consolidation platforms provide outbound transportation efficiencies. Consolidation operations improve container optimization
and reduce less than container load (LCL) shipments. Companies can maximize loadability of containers with multiple vendors
product or in other cases, shift from one order-one shipment to several orders-one shipment. Improving container loadability can
also reduce ocean container freight.
–
Outbound shipments can be tailored to demand, organizing shipments of less quantity but more frequent.
–
Consolidation platforms make possible to elaborate multiple product configurations. Different products or products from
different vendors can be combined and packaged together.
In certain situations, companies locate consolidation platforms in bonded warehouses (Free trade zones, Bonded logistics parks, etc..) or
operate through trading partners in order to avoid a surplus of cost due to customs duties and taxes payment. These situations are:
–
When importing products from other countries into China for re-export;
–
When a light processing or a re-packaging (combine different products or combine products from different suppliers) results in a
different product category to export (ex: co-packing, a carton display with several products for a retailer);
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3. Emergence of direct-to-store
3.2. Upstream components (cont.)
Performing value added logistics services at origin
To drive costs down and increase profit margin, labor intensive activities are being
pushed upstream the supply chain. As a buyer requirement, some value added
logistics activities are being performed by suppliers at a very low cost or even at no cost
such as pick and pack operations.
–
In the fashion industry for example, manufacturers in China deliver products
already packaged per country of destination or also deliver product pre-packs
which consist of preparing packaging units with predefined quantities of several
SKU (stock keeping unit) such as style/size/color assortment.
However, even if in some sectors vendors go so far already, value added logistics
activities are in general performed by the third party logistics (3PL) at the
consolidation platform because it is the consolidator of goods coming from different
suppliers.
When globalization involves the whole supply chain, from sourcing to distribution, there is
a clear advantage in moving value added services like quality control to origin.
–
Problems can be identified sooner and at a stage when it is still easy to fix
them. Products are still close to their manufacturer.
–
Companies can homogenize quality control criteria and the packaging and
appearance of products destined to different markets.
–
And what is more important companies can protect their business by erasing any
track of the suppliers.
Value added Services at
logistics platform at origin

Checking conformity of
packing and product ID

Stock entry/exit Inventory
management

Quality control, labeling, relabeling / ironing / repairing
/ bar-coding / ironing
/trimming / etc.

Order preparation / Pick &
Pack/ Co-packing / Prepacking.

Consolidation / Drop
Shipment

Preparation of export lots

Issuance of new packing
lists
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3. Emergence of direct-to-store
3.2. Upstream components (cont.)
Multi-country distribution operations from origin
Globalization has also lead to global consumer markets and companies are increasingly present in different countries and continents.
As sales in remote markets grow and companies are increasingly able to prepare product to be customer- or store ready at origin, a
centralized distribution through a continental distribution center in Europe becomes inefficient with high costs in transport, inventory
and product handling.
Multi-country distribution from origin has also become an opportunity for medium and even small companies. Until now, medium and
small companies used to have their main market in their country of origin. They used to centralize their stocks in a national distribution
center and re-export a part of the products (usually a small part) to third countries. In the last years, as sales to third countries have
increased considerably and reached remote geographical areas, companies have decided to organize the distribution to third countries
directly from the sourcing area thus bypassing their distribution center in Europe (or in the U.S.).
–
Centralizing distribution from origin allow the company to serve multiple markets ( East Europe, Middle East, Oceania,
America) from the sourcing area, reducing inbound transport.
–
Organizing distribution from the sourcing country optimizes outbound transport by eliminating re-export flows to markets
close to origin countries such as the Middle East, characteristics of traditional distribution through a continental distribution
center.
–
Reduces the need to increase distribution network capacity in Europe, with higher costs than at origin.
–
It is also a potential platform for new markets as companies enter new areas, (including the Chinese market).
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Port of Barcelona Logistics Chair
3. Emergence of direct-to-store
3.3. Downstream components
Cross-docking based distribution
Pressure to increase margins are also pushing companies to work hard on reducing inventory levels. Some strategies may focus on
reducing stocking points in Europe which used to serve as buffers, others work on increasing the velocity of inventory turn a nd some may
combine both strategies. The inventory-holding function of current distribution networks is being reduced in favor of rapid fulfillment.
Cross-docking is at the base to achieve this objective.
Cross-docking is a distribution technique in which an incoming shipment is unloaded, broken down and immediately reassembled into
outbound shipments. Shipments move through a warehouse or a distribution center without being held in storage. Operations can include
cross-docking pallets of products or breaking cargo down to case level distribution. The duration of this activity ranges from minutes to
hours, however it is usually completed within 24 hours. The scope of cross-docking starts at origin as products need to be identified and
packed so that the amount of deconsolidation and mix-matching is minimized. Cross-docking implementation is not without complexity
and demand meeting strict conditions:
–
Reliable and precise inbound cargo delivery: Cross-docking facilities require much more accurate and reliable knowledge of
inbound transport arrival times than traditional distribution facilities because the storage function of the warehouse is eliminated.
–
Information technology to support cross-docking: Fast-paced cross-docking operations require visibility technology such as
bar-coding or RFID to monitor the cargo. Inbound freight must be identified so it can be directed to the right outbound dock and
destination.
–
Enhanced communication with upstream suppliers and carriers and tight collaboration along the supply chain is critical to
support cross-docking operations as well.
–
Flexible and trained workforce to performed fast-paced freight operations.
Companies with large operations, usually have in-house operated cross-docking whereas companies with smaller volumes, usually
outsource cross-docking operations to a 3PL. Outsourcing to a third-party providers offers the ability to share a cross-dock facility with
multiple shippers. Companies may also turn to a third-party providers to build and manage a dedicated facility as well.
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4. Implementation of direct-to-store programs
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4. Implementation of direct-to-store
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4.1.Building direct-to-store containers at origin
The implementation of direct-to-store programs at origin relies on the services performed at consolidation platforms located in China.
Companies shift traditional processes performed at the continental distribution center in Europe to the consolidation platform. This way,
the bulk of product handling and labeling is performed in a low cost country, and cycle time is reduced when compared with running
through a European distribution center.
As the traditional functions that used to be performed at the continental distribution center are now carried out at origin, companies can
load a container with customer-ready product that can be shipped directly to its destination and that doesn’t need any further processing
or handling. Depending upon the industry or the company, origin-built containers can involve:
•
Loading full containers of products of various types from multiple vendors going to a single customer or store,
•
Consolidating shipments for several customers in full containers for deconsolidating at destination.
Origin
Supplier 1
Direct-to customer container
Supplier 2
Consolidation
platform
Supplier 3
Vendors management (and often cargo pick-up from suppliers)
Supplier N
Port of origin
Warehousing
Services performed
at origin
Quality control
Value added logistic services (packaging, labeling, order preparation, etc)
Cargo consolidation into FCL shipments per customer / destination
Customs clearance and transport arrangements
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4. Implementation of direct-to-store
4.2. DC bypass strategies (cont.)
When the origin-built container reaches the port of destination,
depending on the industry and company requirements, it can be
shipped:

Directly to a regional or local distribution center either the
company’s or the 3PL’s

To a company’s customer distribution center

or directly to end-customers or stores.
Store 1
Retailer
Store 2
Port 1
Deconsolidation
facility
Port 2
Distributor DC
Store 3
Store N
Manufacturer
These DC bypass strategies have in common the fact that
shipments move from origin straight to end-customers or stores,
bypassing the main continental distribution centers.
Customer 1
Port 1
Customer 2
Customer 3
In general, containers may contain consolidated cargo for several
customers or stores but also, often, customers or stores don’t have
the capabilities to receive full containers. Therefore product is
unloaded and cross-docked in a warehouse belonging to the cargo
owner (the shipper or the buyer) or operated by third party provider.
Port 2
Regional DC
Customer 4
Customer 5
Customer 6
Customer 7
Port 3
Regional DC
Customer 8
Customer 9
Port 4
Distributor DC
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4.2. DC bypass strategies (cont.)
Deconsolidation at destination
Deconsolidation of containers at destination is required for example
when a container carries products for several stores (or customers), or
when the product final destination doesn’t have the capabilities to receive
an ocean container. Therefore an intermediate facility becomes
necessary to carry out the deconsolidation. Sometimes the process only
involves trans-loading of the cargo from ocean container to a
truckload. Sometimes it may involve cross-docking of the cargo to
prepare store shipments. Deconsolidation of direct-to-store containers
may lead to full-truck loads (FTL), less-than-truck loads (LTL) or to parcel
loads.
Cross-docking at destination
Cross-dock
Trans-loading at destination
Store 1
Destination
Store 2
Port
Deconsolidation
facility
Store 3
Trans-load
Store N
1) Container arrives at
the port of destination
and clears customs.
2) Contents are unload and
store shipments prepared
3) Outbound FTL, LTL or
parcel loads are transported
and reach store.
Source: Expeditors. Distribution services Presentation.2000
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4.2. DC bypass strategies (cont.)
Handling at destination
The level of difficulty of deconsolidating customer ready containers can vary depending on the content of the load. The deconsolidation
can be simple, involving only store-ready pallets of a single product and a few outbound shipments . However, it may sometimes be
more complex. The container may contain different SKU’s with different packaging, require different kinds of outbound shipments and
involve multiple destinations. When the deconsolidation and handling are complex the processes may require to be performed in
special designed facilities and by trained labor force. When outsourced, logistics service providers must be specialized and have a
skilled labor force to handle the cargo.
Container unloading process in direct-to-store distribution
Source: Speed to market white paper. The direct-to-store solution for imported goods.
Norbridge. January 2008.
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4.3. Direct-to-store programs requirements
Earlier Product allocation: Products need to be allocated earlier than in a traditional environment
When implementing direct-to-store distribution, companies must provide the product precise final destination earlier in the process than
for traditional distribution via a continental distribution center. That is because the product is prepared to be store- or customer-ready
and pre-labeled for its final destination at origin. Value-added logistic activities such as labeling and packaging are sometimes
performed by the same supplier or vendor of the product so the right allocation must be known in this case, as soon as manufacturing is
completed.
The earlier a product can be allocated to its final destination the easiest and less costly direct-to-store implementation will be. If
allocation is done at destination it is likely to imply an added cost from performing such activities at destination where costs are
definitely higher than at origin. However companies, and retailers in particular, find particularly beneficial to postpone store allocation as
much as possible to better fit a changing demand. In that sense, to overcome this hurdle, companies increasingly work towards
distribution postponement , which provides companies with the flexibility to create last minute allocations or change allocations based in
latest information on current demand, weather forecasts or other important last-minute data. When distribution postponement is
possible it becomes the key for companies to take advantage of direct-to-store programs while maintaining the flexibility to react to
market demand changes.
Comparison of product allocation timing between traditional and direct-to-store distribution
Direct-to-store distribution
Traditional distribution via DC
Product Allocation
-7
days
-2
0
+24
Port of origin
Customs clearance
Vendors finish goods production
Origin country
In transit
Sailing days
+26
+28
+32
Product Allocation
+35
Cargo reaches
destination
Value added logistic
activities
Cargo reaches Continental DC
Customs clearance
Port of destination
Destination country
-10
-7
-5
-2
0
+24
Port of origin
Customs clearance
Value added logistic activities
Cargo reaches consolidation platform
Vendors finish goods production
Origin country
In transit
Sailing days
+26
+28
days
Cargo reaches
destination
Customs clearance
Port of destination
Destination country
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Port of Barcelona Logistics Chair
4. Implementation of direct-to-store
4.3. Direct-to-store programs requirements (cont.)
Product demand predictability: Products demand must be anticipated and
reliable.
Direct-to-store distribution minimizes inventory throughout the supply chain by
keeping the product moving from manufacturer to customer and eliminating
stops at warehouses. For products which demand can be anticipated, directto-store distribution is the most cost-efficient strategy to implement. With a
reliable demand forecast, companies have enough time to order, source and
prepare products and shipments at origin and ship directly to customers with
shorter cycle times.
When demand can’t be anticipated, inventory holding points become
necessary to avoid stock-outs. In this case, direct-to-store distribution can’t
respond quickly because products need to be produced and are handled at
origin and shipped from far-away with long transit times (at least two weeks).
Contrariwise, products located in inventory in distribution centers at
destination can reach the customer in few days .
As a result, companies often choose to implement direct-to-store distribution
for only a percentage of the total volume. In the fashion industry for example,
companies may use direct-to-store distribution for stores’ first orders, which
are already known some months in advance, but use traditional distribution
and inventory buffers for replenishment (or second orders) which demand is
difficult to predict.
Source: Marshall L. Fisher . What is the right supply chain for your
product?, HBR 1997.
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4. Implementation of direct-to-store
4.3. Direct-to-store programs requirements (cont.)
Volume and scale requirements to ensure full-container load (FCL) shipments:
Direct-to-store distribution may not be an efficient strategy if companies doesn’t have enough volume and scale in their operations.
Direct-to-store flows need to ensure full-container load (FCL) shipments or consolidated less-than-container load (LCL) shipments. If a
company doesn’t generate enough volume in the direct-to-store flows, it may lead to continued less-than-container load (LCL)
shipments. For this reason, until now, most of the companies involved in direct-to-store distribution, have been global retailers or
manufacturers, that provide enough scale. Other companies are mainly using direct-to-store distribution for special promotions or
campaigns (Christmas, Back to school, etc.) which assure enough volumes.
Certainty in transit times:
The direct-to-store model is a speed-based strategy that requires reliability in the lead time and cargo visibility from origin to destination..
–
Direct-to-store models tend to avoid less-than-container-load (LCL) shipments. Conventional LCL services offered by freight
forwarders and non-vessel operating common carriers (NVOCCs) lead to long transit times because of the consolidation and
deconsolidation required at both origin and destination of the cargo. Moreover, LCL shipments are considered to involve
uncertainty and variability in transit times and to increase difficulties to monitor and track cargo.
–
Sometimes companies use full containers for smaller shipments, or turn to air freight, a faster and more reliable alternative but
which cost is approximately eight to ten times that of ocean freight. None of them are cost-efficient alternatives.
What is clear is that direct-to-store flows need fast and predictable freight services to ensure reliability in the product lead time and
visibility from origin to destination.
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Port of Barcelona Logistics Chair
4. Implementation of direct-to-store
4.3. Direct-to-store programs requirements (cont.)
Visibility across the supply chain:
Direct-to-store distribution is based on minimized inventory through the pipeline, exposing companies to increased risks when
disruptions or errors occur. The key to reduce the risk is to increase control over the supply chain. Visibility across the supply chain
provides companies with the ability to view product data in real time, all the time, and provides information to key decision makers to
allow a fast reaction when incidences occur.
Moreover, direct-to-store distribution relies on cross-docking facilities at destination, which need accurate and reliable information in
advance of inbound products to allow an effective cross-docking. The key to any cross-docking operation is the information systems that
support the operations in general, automatic identification technologies (Barcode or RFID) and Electronic Data Interchange (EDI)
transmissions.
Early visibility starting at vendors in origin countries (or at the consolidation platform) and continuing through transport and logistics
operators can maximize cross-docking opportunities, optimize facility use, assist in scheduling inbound freight, and improve labor
planning.
Products need to be packaged “customer or store ready” and labeled at origin:
The cross-docking process at destination will be streamlined and less costly if products are packaged customer ready and are identified
conveniently at origin . While full-pallet products are most easily cross-docked, less-than-pallet quantities also can work although they
are more labor intensive and increase costs. If the product has been pre-sorted and pre-labeled at origin, then the entire unit load will be
cross-dock. Otherwise, the operator must break down the loads, sort the product, label the product for the final store destination and
reload the truck.
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4. Implementation of direct-to-store
4.4. Current success implementations
Direct-to-store distribution has been proved highly beneficial for product categories that take significant advantage of a distribution
based on speed to market and low inventory.
Product categories suitable for direct-to-store distribution meet the following criteria:
a) Products whose value diminishes or expires once a specific period o sales time is over. These products benefit greatly of the speed
to market and the reduced cycle time achieved with direct-to-store distribution.
–
Time sensitive products (Timeliness). Perishable products (food, flowers, etc…), trendy items that are fast old-fashioned
(clothes, electronics, etc..), promotions (promotional products for trade shows, concert events, products launch etc… ) and
collectibles.
b) Products for which high volumes of sales are concentrated in a short period of time. This kind of products benefit greatly of
transportation efficiencies achieved by direct-to-store distribution. Moreover, the bypass of the DC reduces the need for extra capacity
for only short periods of time.
–
Seasonal products such as heating or air conditioning units, seasonal sports products as well as items for short, high-volume
periods such as Christmas decoration items, back-to-school products, Valentine’s day, etc...
c) Products with specific characteristics such as:
–
High unit value. Jewelery or other products that require security. These products highly benefit from shortening time to market
and reducing handling. The higher the value and the inventory carrying cost, the more sense it makes to expedite transportation
and reduce product handling and storage.
–
High volume goods such as furniture or outdoor equipment. Products that do not palletize efficiently or aren’t compatible with
standard storage layouts lead to costly storage. These products benefit greatly of reducing time in inventory and shipping
directly from source to customer.
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4. Implementation of Direct-to-store
Port of Barcelona Logistics Chair
4.5. Benefits of direct-to-store distribution
Direct-to-store distribution concentrates all the benefits of sourcing and operating logistics in a low cost country. It also takes advantage of
the speed provided by the DC bypass strategies based on cross-docking flows. Compared to traditional distribution, direct-to-store reduces
total supply chain cost by reducing product total storage, handling and transportation and increases speed to market.
Direct-to-store
distribution
Less storage
Less handling
Less transportation
Increase speed to market: The continuous flow of product from origin to final
customer, without storage or processing at warehouses or distribution centers at
destination, reduces total order-cycle time.
Reduce end-to-end inventory carrying costs and warehouse costs: as a result
of less product storage and product moving faster from source to customer.
Reduces cargo damage and loss: by eliminating multiple ‘touch’ points and cargo
loading and unloading.
Reduces transportation costs: by eliminating one shipment leg (product origin to
DC) and reducing outbound transport (DC to customer).
Lower supply chain cost per unit (increase margin): As a result of the
transportation efficiencies, lower inventory holding cost and faster cycle time, the total
supply chain cost per unit is lower than through traditional distribution.
Faster order-to-cash: faster fulfillment can lead to faster payments.
Improved distribution network efficiency: No extra distribution capacity is
required for seasonal and peak demand.
Grow business with less infrastructure cost: Decreasing the need to expand
current distribution network while expanding to new markets.
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4.6. Major challenges
Concerns for China‟s changing landscape: Since an important component of the supply chain operations takes place in China,
the country’s ever evolving business environment is a major cause of concern for companies and can hinder further growth of
direct-to-store flows.
–
–
–
A changing and increasingly restrictive and regulatory environment that often affect customs and special zones where
consolidation operations take place such as Free trade zone (FTZ), Export Processing Zone (EPZ), Bonded Logistic Parks
(BLP).
Land price and labor costs are rising in Chinese coastal areas resulting in companies suffering from cost pressures.
China is experiencing a significant shortage of skilled labor force and high turnover rates which lead to increased costs for
3PL to train never-ending new employees and to more mistakes faced by companies (i.e.: errors in order preparation or
pre-packs configuration, etc.).
Increased sophistication of value-added services at origin: Logistics service providers and suppliers at origin are required to
provide more sophisticated product assortment configurations (including mixing product from different suppliers in a carton box) so
that shippers can take further advantage of cargo consolidation and order preparation at origin. Logistics service providers
performance and China’s regulatory environment are key to allow further sophistication of the consolidation operations in China.
Significant gaps between sales and forecast: Even if more sophisticated systems are used to capture product demand
patterns, companies still have to face significant gaps between forecasts and sales. Predicting sales in many industry sectors (like
fashion, electronics, fast moving consumer goods, etc.) becomes more and more difficult, since the number of SKU (Stock
Keeping Unit) and seasons increase and market trends change increasingly fast.
Cross-docking implementation requirements: As seen earlier, cross-docking implementation is complex and requires
sophisticated information technology and communication systems.
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4.5. Major challenges (cont.)
Renegotiating terms : DC bypass strategies may require changes in cargo control and /or ownership, involving renegotiating buying
terms with vendors and sales terms with customers as well as carriers or forwarders contracts and rates.
Poor cargo visibility along the supply chain
Until now, intercontinental supply chains are very fragmented, composed of multiple players with different or even conflicting interests.
Low collaboration among supply chain stakeholders leads to low coordination and low visibility of the cargo. On the other hand, IT
systems required to support a fast-paced cargo flow through the supply chain aren’t always integrated (or even existent) between supply
chain agents. The lack of systems integration leads to fragmented cargo visibility.
Security issues:
Until required technology, such as RFID, is put in place, security requirements currently on the rise, can hinder direct-to-store growth as
container inspections can lead to delays.
Logistics service providers performance: From cargo consolidation at origin to cross-docking at destination, the role of logistics
service providers in intercontinental supply chains is increasingly important. Services required by shippers are more and more
sophisticated both at origin and destination. Best practices, like Direct-to-store, are still emerging and few logistic service providers have
enough experience. Increasing success stories will encourage other shippers to further implement direct-to-store programs.
Coordinating multiple supply chains: Shippers are increasingly setting up hybrid supply chains, relying on a mix of distribution
facilities holding different functions and which location, speed and cost are adapted to a specific product, channel and/or customer
requirements. Coordinating different supply chains can increase difficulty and costs.
Company‟s technical issues: Modifications required in companies’ IT systems (ERP, Warehouse management systems, etc) may be
important
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4. Direct-to-store case-studies
In this chapter are exposed five case-studies of companies that have implemented direct-to-store programs in their imports
from China. They are meant to reflect the diversity of strategies involved in a direct-to-store approach. The five case-studies
are based on white papers o case-studies published by logistic service providers.
–
Retailer of adult products: Direct-to-store distribution to support company’s rapid growth.
–
Furniture retailer: Direct-to-store distribution to support multi-country distribution from China for a retailer
–
Global consumer electronic manufacturer: Direct-to-store distribution to support multi-country distribution from China
for
–
U.S. footwear retailer: Combined ocean and airfreight direct-to-store distribution for the footwear industry
–
Fashion retailer: Combined DC-based and direct-to-store distribution.
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Case study 1: Direct-to-store distribution to support a company‟s rapid sales growth.
Company key factors
•
•
The company is a UK adult retailer relying on multi channel sales,
including over 140 retail stores, online sales through a website and
over 6.000 party planners (home sales). Until now the company’s
main market is the UK. Only two stores are located outside the UK.
China is the main sourcing origin of the company.
The company’s distribution is centralized through a European
Distribution Center (EDC) in the UK. Due to a rapid sales growth in all
channels, the company was having capacity issues at the distribution
center (EDC). The company relied on a 3PL to implement direct-tostore distribution for a part of the total volume of imports from China,
so that it can bypass the EDC.
After:
Combined
DTS and
distribution
via EDC
Before: only
centralized
Distribution
via EDC
EDC
EDC
Note: Figures are only illustrative.
HIGHLIGHTS
Supply chain
•
•
•
The company’s suppliers in China deliver FOB cargo to a
consolidation platform operated by the 3PL in South China. The 3PL
consolidates pre-labeled floor-ready products coming from different
suppliers into full-container load (FCL) shipments loaded per region
of destination. Quality control is also taking place at the platform.
Initial allocation of product is done at origin and is based on stores
size. The definitive stock allocation per store is postponed and is
done later (probably when product reaches UK) by the stores
merchandisers through a web-based application.
The 3PL ships the products to UK stores in regionalized 40’ ocean
containers. Container deconsolidation for further distribution to stores
within each region is likely to rely on cross-docking facilities located
within the ports area.

The company ‘s growth is managed without adding or
expanding physical distribution capacity.

A tentative first allocation at origin allows consolidating
cargo per UK regions, whereas a definitive allocation at
destination provides flexibility to redistribute products
per stores based on updated demand forecasts.

Regionalized distribution in UK allows flexibility in
cargo routing and the use of multiple ports, shortening
inland transportation to the stores.

With a combination of DC based distribution and directto-store distribution, the company can benefit from fast
replenishment and reverse logistics from the EDC,
while speed to market and reduced supply chains costs
with direct-to-store.
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Port of Barcelona Logistics Chair
Case study 2: Direct-to-store distribution to support multi-country distribution from China for a retailer
Company key factors
•
•
•
Multi-country distribution from
China
The company is a bedroom furniture retailer from the U.S. with
worldwide sales. Furniture products are sold through a network
of owned stores, authorized dealers and department stores,
distributed in 51 countries.
The company is sourcing from multiple Asian countries with
important dispersion of vendors. A 3PL manages the operations
in Asia for the company.
The company relies on both a distribution center in U.S. and on
direct distribution to customers and stores.
Supply Chain
•
The company consolidates cargo from Asian suppliers through
a multi-country consolidation platform located in Yantian Free
Trade Zone (South China) and operated by the 3PL.
•
The platform also operates as a specific furniture warehouse.
The 3PL manages vendors, purchase orders, labeling and
performs other VA services. In special, the 3PL merges
bedroom furniture items into a single SKU of bedroom sets.
•
From the platform in Yantian, the 3PL organizes multi-country
distribution to the company’s worldwide markets. Shipments are
directed to:
– The company’s distribution center in U.S.,
– Direct distribution to customers’ distribution centers
around the world
– Direct distribution to stores (owned or third party’s
stores)
Deliveries to U.S. DC
and U.S. Stores
China
U.S. DC
Asian suppliers
consolidation
Yantian
FTZ
Deliveries to customers
Far East, Europe and
Middle East.
Eliminated
re-export flows
HIGHLIGHTS

Single point to consolidate sourcing operations in Asia. The
consolidation platform is located in a Free trade zone to allow
import-export operations in a convenient Tax and VAT
environment. The company also achieves greater efficiency
and cost savings by locating the warehouse in China (versus
warehouse in the U.S.) and by less handling at destination
countries.

The multi-country distribution from China eliminates re-export
flows from the U.S. distribution center. Transportation costs
have diminished by eliminating redundant flows (to the
distribution center in U.S. and re-export to other destinations).
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Case study 3: Direct-to-store distribution to support multi-country distribution from China for a
manufacturer
Company key factors
•
The company is a consumer electronics manufacturer with sales
worldwide. A rapid growth has added new markets and large
distributors throughout the world. The company has also multiple
sourcing origins resulting in a complex inbound supply chain.
•
For its worldwide distribution, the company relies in a European
Distribution Center in The Netherlands for 46% of the volume and
on direct-to-store shipments to large customers involving 54% of
the volume.
Supply Chain
•
•
The company has a consolidation platform in Futian (South China)
for vendors from China, operated by a 3PL. The 3PL picks up
cargo at different vendors and delivers to the warehouse in Futian
where cargo is consolidated into LCL/FCL shipments per customer.
Pick and pack operations and other value added activities are also
performed at the Futian platform by the 3PL.
From Futian’s platform, the 3PL organizes multi-country distribution
with direct shipments to large customers (mainly distributors) in
Asia, Australia, Europe and Middle East. The volume of the
customers’ order is the criterion to decide whether orders go via
the European DC or are shipped direct-to customer from origin.
Distribution strategy decision scheme
Customer
Outside Europe
Yes
No
Volume avg.>15
CBM per week?
No
Yes
Note: CBM = cubic meter
Inbound and direct shipments
HIGHLIGHTS

Single point to consolidate sourcing from suppliers in
China. Shipments are consolidated per single customers to
increase efficiency.

Warehouse costs drop significantly at origin (vs. European
DC costs).

Transportation costs decrease considerably by eliminating
redundant transportation (re-export from European DC).

The company plans to increase direct-to-customer
shipments up to 63% in 2010.
% of shipments (in volume) via European DC vs. Direct-shipment
European DC
46%
Direct- tocustomer
54%
37%
63%
Direct distribution
EDC distribution
Year 2005
Year 2010
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Case study 4: Combined ocean and airfreight direct-to-store distribution for the footwear industry
Company key factors
•
The company is a U.S. retailer of fashion footwear that operates over
220 stores in 37 states throughout the U.S.. Vendors are mainly
located in China.
•
The retailer uses combined ocean and airfreight direct-to-store
distribution for 80% of the flows and traditional DC based distribution
for the remaining 20%.
Supply chain
•
Vendors deliver product to a 3PL consolidation center in Shenzhen,
(China) where products are stored and consolidated for shipments to
the U.S. 80% of the product is shipped direct-to-store.
– Air freight direct-to-store cycle time: 4 days from source to
store.
– Ocean freight direct-to-store cycle time: 4 days of
consolidation, 12 days on the water, 3 days to clear customs
and 2 days to 9 days to be finally delivered to a 9store.
Allocation can be postponed from China (3 weeks out) to the
3rd party DC in Los Angeles (2 to 9 days out).
•
When containers reach the U.S. they are either trucked or railed to
the FedEx hub where they are stripped and cartons scanned into the
FedEx system for delivery to the stores.
•
The traditional model of distribution via a centralized DC is also used
for 20% of the flow. Product is shipped to the retailer distribution
center in the U.S. and placed in inventory where it eventually gets
picked as needed for store replenishment. It is also use to facilitate
product store transfer.
Source: case-study based on article “Fashionably Late is Not Fashionable When Dealing with
Trendy Footwear”. Bakers Footwear Group, Inc. and on case-study from Distribution solutions
Inc. (DSI)), a U.S. third party logistics provider.
HIGHLIGHTS

An IT system providing product end-to-end visibility
allowed the company to postpone allocation until product
reaches the U.S. making possible to use direct-to-store
flows via ocean freight and resolve delivery problems
within the supply chain. The use of airfreight is then
reduced.

The distribution throughout the U.S. stores is managed
by a package and freight company (FedEX, UPS, etc..)
which place products in its package delivery or less-than
truck systems.

The company obtained 25% reduction in the cost of its
distribution operations plus the reduction of the cycle
time from source to store.
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4. Direct-to-store case-studies
Port of Barcelona Logistics Chair
Case study 5: Combined DC-based and Direct-to-store distribution in the fashion industry
Company key factors
•
Global brands from the fashion industry usually supply to own
stores, major department stores and distributors located in
Europe, U.S., Middle and Far East markets.
•
In the fashion industry, outsourcing and globalization of the
manufacturing process is a consolidated trend.
•
Cycle times have been compressed and production lead times
have been reduced from traditional 6 months to 15 days to 2
months.
Supply chain
•
As a result of the globalization in sales, companies have
increased the logistics operations taking place at origin (in big
manufacturing hubs like China). For example in China the main
operations carried out are:
– Multi-country consolidation for Asian suppliers ,
– Quality control operations and occasionally value added
services such as labelling, tagging, ironing and copacking.
– Order preparation for direct distribution to third countries.
Source: general case-study based on the article ‟New trends in fashion supply chains‟ by
Juan Manzanedo, CEO of Logifashion (Chaina Magazine Nov/Dec 2007) and on the DHL
white paper „Rapid response to market‟.
•
Fashion companies increasingly rely on a double supply
chain system: one supply chain driven by cost and
efficiency to provide most basic products (basic collection
with a more predictable demand) and a second supply
chain based on speed, short production times and
flexibility for fashion products (with unpredictable
demand). Each supply chain can use the best distribution
model for its characteristics.
– Direct distribution is used for first orders and basic
products which demand is easily anticipated.
– DC-based distribution is necessary for
replenishment orders. Distribution centers at a
regional level allow frequent replenishments to
stores and reverse logistics, increasing rotation of
products. Products with low selling performance
or outdated garments can be removed from stores
and re-distributed to other locations.
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5. Current extent and forecast
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5. Current extent and forecast
5.1. Current extent and forecast
Europe and North America, two markets, two speeds
Due to unavailability of data, only an approximation can be done to measure the current extent of direct-to-store flows, and it is based
on data provided by logistic service providers.
–
For North American market the percentages of direct-to-store flows can be considered lower than 5% of total flows while for
the European market, the percentage would be considerably lower, around the 2% of total flows.
Impact of Direct-to-store distribution on major trade lanes
Asia-Europe route
Westbound trade
10,5 Million TEU in 2005
Trans-Pacific route
Eastbound trade
13,6 Million TEU in 2005
Direct-to-store volume in
Eastbound trans-Pacific trade
Direct-to-store volume in
Westbound Asia-Europe trade
2%
< 210.000 TEU in 2005
5%
< 680.000 TEU in 2005
Source container trade: UNESCAP (United Nations Economic and Social Commission for Asia and the Pacific)
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5. Current extent and forecast
5.1. Current extent and forecast (cont.)
North America and Europe different patterns have lead to different speeds in the development of direct-to-store distribution.
Several characteristics of the U.S. market have favored the earlier development of direct-to-store programs.
–
Sourcing overseas and production offshoring (the relocation of physical manufacturing processes to a lower-cost
countries), started earlier in the U.S. than in Europe.
–
The U.S. market size and companies’ scale when compared to European ones have better fulfilled the volume and
scale requirements of direct-to-store programs.
–
And finally, in the U.S. the traditional configuration of distribution networks have often locate distribution centers inland,
geographically far from the West coast ports where Asian-originated imports are mainly shipped. Therefore,
companies achieve greater benefits resulting from a distribution based on direct-to-store flows. Bypassing the
distribution center may represent significant savings in transportation and inventory by eliminating redundant
transportation and reducing overall transit times. While in the old continent, European geographical characteristics and
market concentration in its Northern area have lead to locate continental distribution centers closer to the main ports of
Asian imports and thus favored DC-based distribution strategies.
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5. Current extent and forecast
5.1. Current extent and forecast (cont.)
Forecast of direct-to-store flows
The future growth of direct-to-store will largely depend on how current
constraints evolve in the short and medium term and on whether
companies will continue to source as much overseas. However, driven by
carbon footprint reduction and unpredictable fuel price, transportation
optimization is becoming more and more important and direct-to-store
programs an increasingly attractive solution.
Based on forecasts provided by logistics service providers interviewed,
direct-to-store programs are expected to grow steadily in the next two to
five years. The growth will be faster in those industries in which direct-tostore programs lead to more improvements and costs reduction, those
industries with lower profit margins, or those that deal with more timesensitive product.
Forecast of volumes direct-to-store vs. DCbased distribution per sectors
50%
20%
40%
70%
80%
50%
60%
30%
Garm ents
Electronics
DTS
Toys
Furniture
DC
Source: study estimates
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6. Impact on the logistic chain
In this chapter are discussed the major effects that logistic services increasingly performed at origin and DC bypass
strategies are having on the logistic chain from the port of origin in China to the final destination of the cargo in Europe.
The first section examines the impact on distribution networks at destination.
•
Distribution network
•
Value added services at destination
The second section focus on the effects on maritime transportation.
•
Routing and port selection
•
Ocean freight services
•
Shipping networks
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6. Impact on the logistic chain
6.1. Impact on distribution networks at destination
Key factors on current scenario
•
•
•
•
Oil prices and road transportation costs: At 140$ per barrel and pushing up, companies
are being forced to further streamline their transportation flows and network structure.
Companies are increasingly emphasizing the search for alternative modes of
transportation (in which barge and short sea shipping may have a prominent position)
and the configuration of multimodal solutions.
Green Supply Chain (Environmental compliance): Pressure from governments and the
threat of adverse publicity are pushing many global companies to put in place initiatives
to reduce carbon footprint. Some of them will affect their suppliers and logistics service
providers as well. Carbon intensity may become in the near future a major selection
criterion for suppliers and logistics service providers.
Congestion of major European gateways (ports, land and road network): Congestion on
major European ports and road networks are having a deep impact on supply chains
which increasingly demand reliability and timeliness.
EU expansion (new markets in East Europe): The emergence of new markets in
Eastern Europe is modifying the shipping geography. The maritime cargo flows to
Eastern European countries are experiencing the fastest growths. Accordingly shipping
companies are increasing the lines and the frequency of calls to cover this area. New
gateways to service the new markets are being developed in the Balkans and Black
Sea and new transport corridors will emerge accordingly.
Transport Intelligence Global Distribution
Strategies Survey 2008
Please list other issues that have
impacted your distribution strategy
Congestion
18,40%
Fuel prices
18,40%
Environmental compliance
14,90%
Regulation
9,20%
Transport infrastructure
9,20%
Labor availability and quality
8,00%
Quality and availability of 3PLs
8,00%
Political and economical
development
8,00%
Trade barriers
2,30%
ICT infrastructure
1,10%
Reliability
1,10%
Air freight rates
1,10%
Source: Transport Intelligence
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6. Impact on the logistic chain
Port of Barcelona Logistics Chair
6.1. Impact on distribution networks at destination (cont.)
Distribution networks are evolving to adjust to new requirements coming from new patterns in cargo flows, inbound product and
customer service and expectations.
New requirements at destination
New solutions
•
Import oriented network

With the growth of Asian imports, companies
increasingly need to deal with containerized cargo
arriving to Europe through the ports.
Location of logistic facilities closer to the ports
eliminating redundant transportation and gaining
efficiencies

Higher number of facilities to support more
regionalized distribution, though favoring
outsourced versus in-house facilities: As cargo
owners may not have capability to receive imports
directly everywhere is needed, they may increasingly
rely on third party providers. Outsourcing to a third-party
provider allow to share a cross-dock facility with multiple
shippers and bring flexibility to accommodate cargo
peaks and valleys.
Speed-based cargo flows

Products need to go though the pipeline as quick as
possible, reducing lead times.
Increase distribution facility throughput through the
use of cross-docking.

End-to-end cargo visibility through integration of
information technology systems to coordinate more
complex and fast paced flows.

Logistics services at destination increasingly focused on
transport solutions and intermodality.
•
Multi-entry points of the cargo in Europe
Due to markets dispersion and more regionalized
distribution, the number of points of entry of cargo in
Europe increases.
•
Store- or customer-ready inbound cargo
Goods reaching Europe are customer ready and have
different handling requirements than bulk products.
•
•
Reduce end-to-end inventory
Reduce inventory and stoking points in Europe.
•
Reduce supply chain cost.
Improve margins and increase shareholder value.
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6. Impact on the logistic chain
6.1. Impact on distribution networks at destination (cont.)
Speed-based distribution networks
As cargo is increasingly processed and handled at origin, companies are increasingly relying on velocity-based distribution facilities at
destination which ultimate goal is to reduce inventory and increase the speed to market. In general, the speed-based centers provide
import capabilities and value added functions and are located close to a port area. The main difference from traditional distribution
centers is the emphasis on speed, removing the inventory holding function of the distribution center.
To make this possible, distribution facilities are mainly relying on cross-docking techniques. Value-added services may involve simple
cross-docking, offer more complex services involving cargo handling, such as sorting, assembling, bar-coding or re-labeling, or even
distribution postponement, aimed to increase shipper’s flexibility to allocate product.
To support DC bypass strategies, companies rely on facilities that combine cross-docking with other specific functions:
–
Cross-docking, flow-though or rapid fulfillment centers: Logistic facilities where inbound shipments are sorted by delivery
destination and where further handling of the cargo can be carried out in a very short time.
–
Import deconsolidation centers: Deconsolidation centers are very popular in the U.S. market to support direct-to-store
programs. They are usually located close to the port area and accommodate container deconsolidation on single
customers/stores shipments through cross-docking. Managed by third party logistic providers, they often can provide distribution
postponement. Rather than allocate product at the country of origin, it allows the company to wait until the product reaches the
port of destination to decide its final destination.
–
Mixing centers: Consolidation centers at destination countries where companies can bring in product coming from different
geographical locations. For example, mixing products sourced offshore and locally produced goods or country-specific items for
local distribution.
–
Trans-loading facilities: Intermodal facilities, located in the port area, that allow transfering inbound ocean containers to
outbound trailers.
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6. Impact on the logistic chain
6.1. Impact on distribution networks at destination (cont.)
Postponement distribution
In the context of this research, distribution postponement means that product allocation to its final destination is postpone d until the
product reaches the port of destination. Product allocation is traditionally performed in the continental distribution center. However,
when product is supposed to bypass the continental distribution center , product is prepared to be store- or customer-ready and prelabeled for its final destination at origin. Because of long ocean transit times, original allocations are made three to four weeks in
advance. At the time product reaches the port of destination, demand may have changed and companies risk to face increased lo st
sales or obsolete products in stores or the need for more store transfers because of these changes.
Postponement distribution can provide up to three more weeks of time, depending on the ocean transit time, to allocate product to a
customer or a store, providing more flexibility to companies to base allocation on more updated demand data. Postponement
distribution is especially attractive for retailers and manufacturers in industry sectors where demand is uncertain.
Logistics service providers together with IT companies are already providing sophisticated distribution postponement services to U.S.
companies, offering en route allocations. The labeling is managed at each of the factories or vendors overseas or performed by the
third party provider at the consolidation platform.
One interesting example is the IES DC bypass package from the supply chain software provider IES Ltd:
‘’As the container arrives to the destination port, the origin-generated barcode labeled cargo is off loaded on the dock and an EDI
message is sent to the buyer that the cargo is in the deconsolidation facility or warehouse and awaiting allocation details. The buyer
replies with the allocation details via EDI message. On the dock the cargo is scanned as it moves down the conveyor which triggers
the system to print the address label containing the final delivery information including the address and barcode. The labeled
packages are sent cross-dock to the package delivery system or common carrier FedEx, UPS, etc. The system automatically sends
out ship notices to the buyer with the carrier details as well as send carton information to the carrier’’
Postponement distribution turns the vessel into an extension of the consolidation platform in China and provide visibility to the intransit inventory.
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6. Impact on the logistic chain
6.1. Impact on distribution networks at destination (cont.)
Other important functions performed at the distribution network at destination
Even if products increasingly bypass traditional continental distribution centers, companies still realize the benefits of having distribution
facilities at a regional level with some inventory. Proximity to market allow quicker replenishment of fast-selling items when necessary.
As mentioned earlier, companies will likely choose to combine DC-based distribution and direct-to-store on a right balance. Distribution
facilities at a regional level will likely continue to carry out traditional functions for a percentage of the product flows, benefiting from
sophisticated value added services such as postponement production.
–
Postponement production: provides a wide range of opportunities to delay the moment of product differentiation such as to
put off a last step of the product production, assembly or kitting, until the product is sold, providing more flexibility to the
company to adapt to changing trends. Another example could be product localization, where locally procured or country
specific items are added prior to shipment to the store or end-customer.
However, as distribution facilities are released from a percentage of the cargo, it may increasingly be destined to manage new flows
such as the ones associated to reverse logistics. Reverse logistics rates vary significantly by industry, however companies are already
recognizing the value of implementing this function.
–
Reverse Logistics: Reverse logistics is the process of removing goods from their final destination for the purpose of capturing
value, or for proper disposal. Reverse logistics includes processing returned merchandise due to damage, seasonal inventory,
restock, recalls, and excess inventory but it also includes recycling programs, hazardous material programs, obsolete
equipment disposition, and asset recovery.
Interesting examples of reverse logistics include product returns (removing low selling performance or outdated product from
stores) and store transfer increasing rotation of products (re-distributing products to other locations or outlets where they can be
sold).
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6. Impact on the logistic chain
6.2. Impact on maritime transportation
Key factors on current scenario
•
Shipping lines consolidation has lead to more powerful players and increased competition among the industry. Vertical
integration mainly through subsidiaries and greater emphasize on sophisticated services are aimed to increase revenue
and adjust better to shippers increasing requirements.
•
The search for operational cost savings has lead to vessels’ size growth on major trade lanes and to operate on different
network formats, direct link networks and transshipment based on hub - feedering services. In the Europe-Far East lane,
liner services operate on multiple-port itineraries.
•
Ocean freight has become a commodity. In most trade routes, the same or very similar freight rates are applied for
specific origin-destination port pairs without significant qualitative service differentiation.
•
Proximity to cargo destination still stand out as main criteria on the port selection. However reliability and certainty in the
transit times and customs procedures are already key criterion for time-sensitive shippers.
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6. Impact on the logistic chain
Port of Barcelona Logistics Chair
6.2. Impact on maritime transportation (cont.)
Increasing number of ports of entry of the cargo: In the traditional centralized distribution structure, the cargo is usually directed to
the port closer to the continental distribution center. In the trade with Asia, the major ports of discharge have been the No rthern range
of ports, from Hamburg to Le Havre which are located at proximity of the European distribution centers. When it is possible to bypass
the continental distribution center, cargo can be shipped to the port closer to the cargo final destination. In this case, the cargo can be
directed to different ports of entry, depending on the destination.
Traditional distribution model
Europe
Single
point of
entry
Direct distribution model
Multiple
points of
entry
Europe
Continental DC
Deconsolidation
centers or regional /
local DC
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6. Impact on the logistic chain
6.2. Impact on maritime transportation (cont.)
Ports diversification: The bypass of the distribution center increases the flexibility in port selection. Cargo may be directed to
alternative or secondary ports with considerably lower costs than hub ports like Rotterdam or Hamburg. Shippers choosing to route
the cargo to alternative ports can also avoid congestion of main gateways.
However potential flexibility in the routing can be constrained by several factors related to the service offered in alternative or
secondary ports.
–
Service-related constraints: Lack of efficient and reliable port infrastructure and processes.
–
How ports are linked to current shipping networks. If frequency of direct shipping services is poor, it could lead to longer
transit times and higher inventory carrying costs for the shipper. If transshipment from main hubs takes long time, it would
lead to the same problems.
–
Availability of a good transport network infrastructure in the hinterland.
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6. Impact on the logistic chain
6.2. Impact on maritime transportation (cont.)
Increased port service requirements
Ports selection is increasingly relying on service-related criteria. The speed and reliability of bureaucracy related processes such as
customs clearance or security procedures are currently key in port selection. Ports located in Southern Europe are often rule out by
shippers when selecting ports of entry in Europe because of uncertainty in the clearance time and service provided by their customs
office. One interesting example of service improvement is the port of Shanghai which has introduced measures to speed customs
clearance and implemented actions to give preferential treatment to some categories of companies with high export turnover.
According to Shanghai Customs Since the implementation of EDI paperless clearance in 2002, the average customs clearance time
for the imports and exports have been shortened to 0.66 days and 0.03 days, down by 10% and 85% respectively. The average
port clearance for the exports is 1,47 days and 4,3 days for the imports (Port clearance time includes the time necessary for going
through all the procedures including quarantine, tally, customs clearance, duty payment, uploading goods, goods pickup and
transportation etc.). Some examples of the measures implemented by Shanghai Customs are exposed below:
Urgent clearance. At certain customs checkpoints where cargo volume for clearance is particularly high, speedy green lanes would be set up for priority
clearance. Fast clearance is granted for particular areas such as the free trade zone and the export processing zone.
5 plus 2 days rule. Shanghai customs make sure goods clearance takes place 24/7.
On-site inspection. For import or export goods which are difficult to be delivered to customs checkpoints for inspection, upon request by the enterprise,
customs officials may be sent to the production facility or cargo handling facility for on-site inspection and clearance.
Online declaration. Enterprises may complete customs declaration online through China E-port platform by transmitting via computer all relevant
information for declaration to the customs authorities at the port of entry/exit. EDI paperless clearance.
Advance customs declaration. In order to speed up customs clearance for import-export goods, enterprises may present the relevant documents to
Customs three days prior to the arrival of import goods or delivery of export goods, and the goods will be inspected by Customs on-site.
Enquiry service. A nationwide customs enquiry and hotline service has been introduced, with priority being given to large high-tech enterprises in
handling their queries about customs clearance, data cross-checking, complaints and urgent requests.
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6. Impact on the logistic chain
6.2. Impact on maritime transportation (cont.)
Emergence of port centric logistics
More then ever before, with the unprecedented volumes of containerized goods, ports both at origin and destination are becoming
key nodes of intercontinental supply chains. The increasing importance of ports in the design of faster and more efficient supply
chains, has driven terminal operators, carriers and logistics service providers to set up an increased number of logistic facilities within
the port area leading to the emergence of the Port centric logistics concept. This concept of port centric logistics emphasizes the
integration of logistics and port services in intercontinental supply chains.
The port-centric model, driven by global terminal operators, turn both ports of origin and destination in platforms that support shippers’
supply chain operations by accommodating non-core port activities in the port area.
–
At origin: In China the port-centric model is based on linking the port with the logistics platforms where cargo consolidation
and value added services are being performed. The port becomes an information hub, providing cargo visibility and
facilitating the link between land and sea operations (customs procedures, centralizing planning for port and logistics
processes, etc..)
–
At destination: In the United Kingdom, ports are promoting the setting up of logistic facilities within the port area to
accommodate the distribution function. As today most of the cargo arrives through a port, traditional inland location of the
distribution centers is loosing sense in favor of in-port distribution centers, where containers can be unpacked and goods can
be handled and loaded without leaving the port allowing for direct transportation from the port facilities to customers and
reducing transportation redundancies and costs. (reducing for example the transportation of empty containers back to the port
from the inland distribution center)
Both at origin and destination, port-centric models increase the port’s value in the supply chain and support best practices in logistics
such as direct-to-store programs. However ports in Europe are already constrained by limited space, and are already struggling with
environmental issues and an unpopular vision of the in-port activities.
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6. Impact on the logistic chain
6.2. Impact on maritime transportation (cont.)
Increasing demand of premium services
Sophisticated logistic practices like direct-to-store distribution or the simple use of cross-docking techniques at a distribution center
require certainty and reliability of the flow of product through the supply chain. Therefore, any delay in the delivery of the cargo to
its destination can expose the company to disruptions in the distribution of products and to stock out and lost sales. In these cases,
while freight rates are not determinant when organizing shipments other factors like speed, reliability and certainty linked to
transit times become critical. Until now, shippers have had few alternatives regarding the speed and reliability of the port-to-port
ocean transit times other than to select the more reliable carriers offering the shortest transit times. However certain shippers are
ready to pay more for faster and more reliable services to avoid disruptions in their supply chains. To respond to this demand,
shipping companies and logistics service providers are increasing the offer of premium services, more expensive than
conventional ones but with a higher service level.
–
One example is the new port-to-door guaranteed service for Less-than-container-load (LCL) shipments from China
to U.S. launched by APL and Con-way in 2006. The service combines ocean and truck services and offers date-definite
deliveries and a money-backed service guarantee. ‘’ The service gets your LCL shipment to anywhere in the continental
United States within five business days after arrival on the West Coast ports, if it’s late, you receive a 20% refund
guaranteed’’. The service is oriented to customers that need a faster and more reliable transit time than conventional LCL
service but don’t want to pay for airfreight. It offers a date-specific reliability as airfreight but at much lower cost. The
service, according to the press, is priced at 33 percent of standard airfreight. APL is a subsidiary of Singapore-based
Neptune Orient Lines and Con-way is a U.S. freight transportation and logistics services company.
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6. Impact on the logistic chain
6.2. Impact on maritime transportation (cont.)
New competitors of ocean freight services
As mentioned before, European supply chains are evolving to become more product- and/or channel-specific in order to adapt to
different customer and product service level requirements. In this scenario, in some industry sectors, companies are increasingly
combining air and sea freight for the same category of products. The transport mode selection is then based on speed to market
requirements. For some specific high-value or volatile products, or simply to increase the speed to market, reducing inventory costs
and reducing out-of-stocks may compensate the cost of using airfreight. As companies increasingly focus their distribution strategies
on speed and reliability, airfreight becomes a more attractive option. However unforeseeable fuel prices and environmental issues
gaining notoriety make airfreight a less competitive option, even for its captive flows.
In the long term, the establishment of a railway freight service from China to North Europe may also become an interesting alternative
to maritime transportation thanks to a shorter transit time (current tests take 17 days from Beijing to Hamburg). The Eurasian Land
bridge has 10.000-kilometres and go across China, Mongolia, Russia and then through to Belarus, Poland until Hamburg.
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6. Impact on the logistic chain
6.2. Impact on maritime transportation (cont.)
Shipping networks
In the Far East–Europe trade lane, the liners mainly operate on a multi-port calling network. Increased centralized multi-country
distribution from China will have an impact on cargo flows in this trade lane and is likely to have implications on how shipping
lines route vessels. Increasing shippers’ requirements for speed and reliable service will also be noticed by increased customeroriented shipping lines.
How shipping companies will link ports will also respond to shippers’ requirements of reliability and speed to market. However it
is difficult to glimpse which of the current models, hub-and-spoke or multi-port network will stand out, if any does. Both models
of shipping networks when taking into consideration a diversification of ports of entry in Europe, may lead to similar problems of
lengthen transit times.
The result will likely be a trade-off between the objective of the shipping companies, to increase profit, and that of the shippers,
reliable and short transit times at the lowest cost.
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6. Conclusions
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6. Conclusions
Supply chains

Globalization in both sourcing and distribution have created intercontinental supply chains, longer and more complex
to manage. Companies have respond to this challenge by offshoring logistics to China (or to other manufacturing
hubs).
–

Consolidation platforms located in China play now the role of traditional continental distribution centers. Labor
intensive activities are performed in China by suppliers or third party logistics providers so that product is ready to
distribute to global markets bypassing the continental distribution center at destination. Centralizing distribution from
origin eliminates redundant transportation associated with the flows to the traditional continental distribution
center and re-export to end-destinations.
In Europe, companies are redesigning physical distribution networks to adapt to new patterns in cargo flows, inbound
product type, and market dispersion.
–
Companies are switching from a traditional stockholding supply chain system to a cross-docking system which
provides speed to market and inventory reduction. The inventory-holding function of current distribution networks is
being reduced in favor of rapid fulfillment. Cross-docking is at the base to achieve this objective.
–
To respond to the increased flow of product arriving through ports, companies are increasingly locating distribution
facilities closer to ports.
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6. Conclusions
Distribution strategies

This new context has favored the emergence of a logistic best practice known as direct-to-store distribution based on
direct shipments from origin to store or customer bypassing the traditional continental distribution center.
–
Direct-to-store is still an emerging practice, mainly implemented by global retailers and manufacturers, that reduces
overall supply chain costs, inventory and increases speed to market.
–
Implementation is still limited because of direct-to-store requirements on volume, precise demand forecast, and
improved cargo visibility. However, constrains are being overcome as new solutions are created. Innovative ocean
freight premium services that provide certainty in the ocean transit time or sophisticated IT systems to allow allocation
postponement are good examples.
–
In the next years, companies will likely find a balance between DC-based distribution and direct-to-store
distribution so that benefits and opportunities from both types of distribution are seized.
–
In logistics best practices like direct-to-store, the role of logistics service providers becomes broader (from origin
platforms to cross-docking facilities at destination) and is more determinant in the success.
–
This new global context is also increasing the competition between transport modes. Air freight, premium ocean
freight services or the Euro-Asian rail freight services can start to compete for similar flows.
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6. Conclusions
Maritime trade flows and port selection


A significant growth in multi-country distribution operations centralized from origin platforms in China will likely have
an impact on regional and worldwide traffic flows and thus in the flows shipped to or from European ports. Two main
effects can be emphasized:
–
Increasing China-originated cargo flows to all destinations (China-Middle East, China-Eastern European Countries,
etc..).
–
Accordingly, European ports would lose the inbound and outbound cargo flows corresponding to the products that
used to go through the European continental distribution centers for later re-export to third countries.
DC bypass strategies bring flexibility to the routing of the cargo to its final destination. According to global logistics
service providers interviewed, 30% of the China-originated cargo could shift to alternative or secondary ports in the
next two to five years.
–
A redistribution of China-originated cargo flows among European ports. The bypass of continental distribution
centers makes possible to direct the cargo to alternative ports geographically closer to the cargo final destination. The
North European range of ports could lose traffic in favor of alternative ports in the Mediterranean, Adriatic and Black sea.
–
Cargo may be directed to secondary ports with considerably lower costs than hub ports like Rotterdam or Hamburg.
Therefore, there could be a greater diversification of the ports of entry in Europe.
–
As these new opportunities arise, the competition between geographically close ports will probably increase.
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6. Conclusions
Port development and service provision


Ports can take advantage of their central position in the physical flow of cargo by promoting in the port area the
provision of non core port activities.
–
Ports in China are becoming an extension of consolidation platforms.
–
Ports at destination can accommodate the provision of the distribution function and other added value logistics services.
–
The integration of logistics and port services in the ports will be key to attract and retain cargo flows.
–
By facilitating the development of value added logistic activities within the port area, shippers and logistics service
providers can become ports‟ new direct customers and a new source of profits.
–
Ports can lead programs to improve efficiency of and collaboration between all agents participating in the supply chain.
In a context of increased competition, to attract and retain new cargo flows like direct-to-store, the level of efficiency
and performance of ports will be key.
–
Improving frequency and number of regular maritime services calling at the port can reduce transit times. Shorter
transit times is a competitive advantage for ports to attract cargo flows and especially direct-to-store cargo flows.
–
Improving speed, reliability and efficiency of bureaucracy related processes such as customs clearance and security
requirements compliance and avoid bureaucracy related-disruptions in shippers supply chains.
–
Improve port productivity and assure reliable and high-speed terminal operations and lower handling costs.
–
Facilitate the provision of integrated port, logistic and intermodal services.
–
The availability of cross-docking facilities will become key in port selection.
–
Foster the introduction of new technologies to facilitate cargo visibility in the port area.
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