There is an exciting feel to the logistics and distribution industry at the moment. Yes, the sector is beset by fuel problems, both the cost of oil and in terms of the damage it does to the environment.
But the underlying structure of the industry is evolving fast and although, in the past, this industry was not known for its leading edge use of IT, these days a company with a poor technology infrastructure will struggle.
There has been a great deal of consolidation in the market over the last few years, with many mergers and acquisitions.
This has not only meant that IT departments have been heavily involved in integrating the systems from merged companies but also that the market has become increasingly competitive, with IT directors playing a more important strategic role, using technology to support business innovation. This is particularly true when using optimised systems to reduce costs and improve efficiencies.
Learning new competencies
The industry is already adept at distribution, supply chain, warehousing and freight forwarding systems, with large organisations employing sophisticated database tools and techniques.
But the arrival of the internet, together with mobile technologies, has changed the landscape. Combine this with the highly detailed delivery information systems and it makes for a far more effective business. It all needs a sound technology backdrop. The Royal Mail, for example, uses a database with the details of 27 million delivery addresses to ensure that its largely automated sorting and interpretation systems deliver business benefits in the form of improved efficiency and a higher quality service.
The optimisation of distribution is also having a knock-on effect on many of the large business customers of logistics firms, who are increasingly under pressure to prove their corporate social responsibility credentials.
By ensuring effective distribution channels, with full loads and reduced routes, they are not only reducing their overall emissions, but also saving costs at the same time.
Web-based applications for customers, as well as close online partnerships with third-parties, are ensuring further efficiencies and cost savings in the industry. There are security concerns to take into account with web-based product offerings, such as viruses and denial of service attacks, but the industry is taking a sensible balanced approach to these.
In a competitive industry sector, IT is critical and CIOs are an integral part of the corporate business strategy.
Royal Mail Group
- Headquarters: Wolverhampton
- Revenue: £9 billion
- Head of IT: David Burden, group technology director
- CIO 100 2006: Ranked 9
The last year was a bit strange for the Royal Mail Group, says group technology director David Burden, but in IT terms it was pretty good. “We managed to cut 10 per cent from our costs, while at the same time, absorbing a range of new technologies and systems.” Competition has opened up the market and the Royal Mail’s competitors are carrying 2.5bn items, which is significant when you consider it is a 20bn-item market, according to Burden. There have also been big structural changes and online fulfilment companies like eBay have had a big impact.
“We have done very well in the DVD mailing market for example, using a specifically designed packet that is more efficient and easier for the automated systems to read,” says Burden.
“There has been a shift in the industry – a drop in traditional social letters and a rise in big business interacting with the customer. This changes the business internally.”
Using IT to help the business operate more effectively is a key focus. The growth of the Royal Mail’s internet capabilities, particularly Smart Stamp – its online postage service – has been impressive, says Burden.
He likens the technology to the early days of airlines e-ticketing systems. “You can’t imagine the industry without them now.”
The right delivery
The Royal Mail has done a lot of work on its central asset, the Pegasus delivery point system, over the past 12 months. The Royal Mail delivers to 27 million different places in the UK and Pegasus keeps data about all of them. The Pegasus system is different from the postcode address file – holding the details behind the letterboxes, such as whether there is difficult access to an address or a hostile dog there.
“As a 27m item database it is enormously critical to us and helps drive the business using address interpretation,” he says.
The Royal Mail handles 80m items of mail a night – 120m during Christmas – and as much of that is done through automation as possible. “It is a very sophisticated system, taking an image of the letter and using character recognition to find the address. It then interprets the address and links it up with the database to validate it,” says Burden. “The read rates are in the high 90s and the systems can handle 40,000 items an hour, so the sort rate is very quick and reliable. This year we have worked to improve the efficiency, accuracy and quality of the service – 94 per cent of first class letters now arrive the next day.”
It has also extended the automation to include flat sorting of items of magazine size and packet sorting. The letter sorting, traditionally, went to the 2,300 delivery offices, but now these can be sorted to the individual postman and the sequence of addresses to walk the route in the most efficient manner.
At the back-end, the Royal Mail is continuing its implementation of SAP financials and procurements and Oracle-owned Siebel customer management systems. “What has been hard this year is looking at customer facing systems. We have several hundred thousand business accounts and we want them to work directly out of the system. Until recently many of them used a paper docket system, which wasn’t that reliable. We are replacing that with a completely online service, which goes from defining the mailing on the internet to the billing and payment systems.”
"The nature of relationships with suppliers changes as technology moves along"
David Burden, group technology director, Royal Mail Group
Plans for the year ahead include revitalising relationships with service suppliers. “The nature of relationships with suppliers changes as technology moves along,” he says. “The contracts and the relationships have to change as well. After a few years it is a good idea to have a look at ways to revitalise them.”
The organisation has been using RFID tags to monitor its performance – using them on thousands of special mail items. “We can monitor our service using test letters and an external firm. It is very interesting, although there are some problems, such as when goods are held in metal containers,” says Burden.
The Royal Mail is also increasing the work it does with mobile devices. Parcel Force already uses PDAs so its delivery people can communicate in real time with depots but the organisation is now giving PDAs to postmen so that when they get signatures for items they can be captured more easily and the details put online.
- Headquarters: London
- Headquarters: London
- Revenue: 22.5 billion euros (2006)
- Head of IT: Nigel Underwood, CIO
- CIO 100 2006: Ranked 8
DHL Logistics is way ahead of its planned integration with UK logistics company Exel – which parent company, Deutsche Post, bought at the end of 2005 for £3.7bn.
The organisation had said it hoped to complete the integration in two to three years but Nigel Underwood, CIO of DHL Logistics, is hoping to conclude the integration work by the end of this year.
“The key thing has been that this is our integration project, not our customers,” he says. “People have been very focused on it. While we have been doing it we have had some good customer wins from Toys R Us and the NHS. We are really pleased that the acquisition has been positive for our customers.”
Merging the sea and air freight business into one has meant uniting cultures and sites. Underwood says aspects of it have been hugely effective, such as getting 80 per cent of the business on to a single network. Work has been carried out on the underlying infrastructure and on creating standards through the analysis of the two organisations. “We picked out the right products, people and processes and selected a robust network,” says Underwood.
DHL Logistics has around 2,000 IT staff globally and uses shared services from the group as well as some work being done by third-parties. Deutsche Post has four business units, of which Logistics is the biggest by revenue. “We tend to keep customer facing operations, managed services and development work inhouse,” says Underwood. “We are not complacent about the integration work but we are certainly on track to deliver. A fair share of the work will be completed very soon.”
The next phase for Underwood and his team will be to actively engage with the new capacity and scale of the organisation, both for colleagues and customers, then to build on or extend those capabilities. “We are a barometer of global trends in areas like supply chain automation and we work closely with customers in Asia and Latin America to ensure we can move ahead together,” says Underwood.
"We are a barometer of global trends in areas like supply chain automation and we work closely with customers in Asia and Latin America to ensure we can move ahead together"
Nigel Underwood, CIO, DHL Logistics
He says the organisation has to be aware of the geopolitical aspects of global business as well, such as tighter security and business continuity. “These are the key things to take seriously – protecting against threats and how we respond to them. That means that expectations and growing business needs are more demanding than even a year ago. In terms of business process we have to be much more transparent.”
He adds: “Security has to be a balanced business judgement. Information security is constantly upping the stakes through e-user awareness and risk assessment. We also have to have contingency plans for global disasters like Avian flu, for example.”
In the last 20 years international business has changed a great deal, says Underwood. He thinks the changes in design and direction mean that the operations that are now being built are bigger, better and offer the organisation much better value than they did in the past. “We have taken a more architected approach and are buying rather than building where we can. But solutions need to be joined up and there is a big difference between architecture and integrating systems with the customer. The technology is now very good. In some sectors we are working very closely with customers, for example in global healthcare and spare parts for the automotive industries. There are more new developments and we are acting with third-parties to develop these.”
Underwood also says that social corporate responsibility and the energy debate are having an impact on the business. He believes that IT has a key role to play here in the future.
“Of course, IT can help with reducing the paper used and now we recycle electrical goods but more fundamentally, we can build and manage systems that help with emissions.”
- Headquarters: Chippenham, Wiltshire
- Revenue: £2 billion
- Head of IT: Chris Mason, group IT director
- CIO 100 2006: Not included
Wincanton operates in 15 European countries, although around 80 per cent of its business currently comes from the UK. The company has grown substantially through acquisition, buying and integrating five other firms in the last two years alone. Chris Mason, group IT director, says that the consolidation occurring in the logistics and distribution industry means that much of his work has been concerned with integration.
“Wincanton is a solution provider and systems integrator. My role is to offer supply chain solutions to customers, the smaller part is to support the corporate business systems,” he says. “Wincanton doesn’t have the range of an organisation like DHL – it does not do post or parcels – but it does everything in the supply chain from raw materials, warehousing, transport and freight forwarding, including land, sea and air, where necessary.”
Because of the nature of Wincanton’s business, Mason’s team is constantly working on start up projects for new customers, typically in the warehouse and supply chain planning arena, but a big priority is to improve the company’s competitiveness.
“We are persistently sharpening our capability to integrate systems and processes, but the continuing consolidation in the industry overall makes for a more competitive business environment, so we are constantly improving our competitive offerings as well.”
His team supports the company’s product development of new services for customers and a major part of his role is to work with the rest of the company’s development management to help drive the business forward. “We clearly have to help drive business innovation.”
For example, carbon footprints are on the minds of customers at the moment, says Mason. “We can really help with that. A major part of our role is in planning and optimising so that we minimise waste.” Fuel costs are another important issue and the company is focusing on being efficient to remain competitive “The value of our customers products may come down but our transport costs continue to rise. We have to use intelligence to deal with that.”
In terms of innovation, Wincanton is looking at three areas: SOA for warehouse management; optimisation for transport; and hosted applications, that can offer customers low costs and a fast set up. For example, Mason says that health and safety is a major part of the logistics business and the company will be launching a web-based hosted offering across Europe this year.
"It would be nice to have all the IT tidy and rationalised but we have to support some of the key systems from acquisitions until we can improve on the functionality and cost efficiency"
Chris Mason, group IT director, Wincanton
This will allow a focused and effective way of handling health and safety information for its customers. “Because it is a web-based corporate application the IT element of the project is reasonably light, it is the business perspective that needs more effort.”
The company is also in the early stages of an asset management project to consolidate and streamline its assets across Europe following so many acquisitions. “We will look at exactly what equipment and software we have so that we can efficiently run everything from the central infrastructure,” says Mason.
Wincanton acquired Premium Logistics and Lane Group home delivery in October 2005, and RDL Construction Logistics in October 2006. The acquisitions mean there are quite a few legacy systems for Mason’s team to support over the next few years.
“It would be nice to have all the IT tidy and rationalised but we have to support some of the key systems from acquisitions until we can improve on the functionality and cost efficiency,” Mason says. “In a contract-based business like ours this has to be factored in, although we will be retiring some of them over the next 12 months.”