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Internal, vertical and horizontal logistics integration in Italian grocery

distribution

Article  in  International Journal of Physical Distribution & Logistics Management · November 1996

DOI: 10.1108/09600039610149101

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Mauro Caputo

Università degli Studi di Salerno

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Valeria Mininno

Università di Pisa

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Internal, vertical andhorizontal logistics integrationin Italian grocery distribution

Mauro Caputo and Valeria MininnoFaculty of Engineering, University of Pisa, Pisa, Italy

IntroductionThe concept of integrated logistics was introduced some years ago, at firstreferring to the different phases of the business operational cycle and to thedifferent functions which allow it to be carried out[1-5], and later, even morefrequently referring to the whole channel between production andconsumption and to the relationship of physical and information exchangebetween the institutions of the channel[6-9]. This theme assumed greatimportance in grocery distribution where logistics costs represent aconsiderable part of the total interface costs between manufacturing industryand commercial enterprises; in particular in Italy (logistics costs in the grocerysector, in Italy, are about L25,000 billion) they reach about 50 per cent[10,11].

A clear commitment to finding solutions to increase operating efficiencyin the logistics channel can therefore be observed in both business theoryand practice (in Italy, after a similar experience in USA, a programme ofcollaboration between branded product industry and large-scale tradebusinesses, called efficient consumer response (ECR) has been started. Theaim is a global and integrated re-engineering of grocery distributionchannel)[12-15]. This commitment can be distinguished within thedistribution channel as a whole[16-19], in relation to the type of flows whichproceed in it, to the functions carried out, and to the institutions which putthem into effect.

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

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

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

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

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

Received January 1996Revised May 1996

International Journal of PhysicalDistribution & LogisticsManagement, Vol. 26 No. 9, 1996,pp. 64-90. © MCB University Press,0960-0035

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

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

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

On the basis of the features of the sector and of the choices adopted, thesefunctions can be carried out by different institutions (Figure 1): producer, agent,distributor, logistics service supplier and consumer.

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

Referring to these institutions, logistics integration areas are analysed,within each business (internal integration), between businesses located atdifferent stages of the channel (vertical integration), and between differentbusinesses located on the same level of the channel (horizontal integration), inorder to identify some organizational and managerial solutions for improvinginterfunctional and interorganizational co-ordination[24]. Internal andhorizontal integration are the requirements for vertical integration to produceimportant synergies for the institutions which adopt it.

Figure 1.Functions, flows and

institutions in thelogistics channel of

distribution

Distributor

Logisticschannel of distribution

Flows

Physical

Information

Functions

Order management

Inventory managementand control

Packaging andunitization

Warehousing

Handling

Institutions

Producer

Consumers

Logistics serviceprovider

Agent

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Integrated logistics in the branded products industryThe importance of integration between logistics activities within industrialconcerns, about 20 years after the first studies were carried out on thissubject[25-27], is now generally recognized, not only by academics but also byhigh level management. Businesses, however, adopt solutions very differentfrom one another both for the level of integration, partial or total, and for themodalities with which the integration is reached, through the use of computerbased systems, of communication networks and through choices related tobusiness organization[28-32].

Referring to the branded industry organization chart, logistics management,if present with this name, whatever its position within the organizationalstructure may be, always supervises distribution activities management,sometimes associates it with production planning and in only a few cases alsomanages purchasing. In other words, in this sector, the complexity of logisticsprocesses lies especially in managing the post-production phases, from productstoring in central warehouses and subsequent transit to local warehouses, totransport and final delivery to customer. As a consequence, logistics organiza-tion is typically distribution oriented. Apart from the interdependencies, inmaterials management, between purchasing and production, the analysis,within this paper, will be focused on physical distribution activities and theirrelationship with production planning.

The main responsibilities for distribution logistics concern operational andstrategic decisions[33,34] connected with the management of customer orders,finished product stocks, central and local warehouses, transit-points, primaryand secondary transport, goods packaging and unitization. Industries do notalways decide to carry out all these activities with internal resources, sosometimes they prefer to entrust some of them to external businessesspecializing in logistics services. Delegation to a third party[35] almost alwaysconcerns primary and secondary transport, often local warehouses and transit-point management and only in a few cases the whole distribution process.Whatever choice is made about the degree of decentralization of physicaldistribution functions, logistics requires that industrial concerns have toestablish the contractual aspects of the relationship with external institutions,to control performances and operationally to co-ordinate interface activities.Furthermore it has to supervize inventory management activities and producthandling in the service supplier’s warehouse.

With reference to the distribution process, what follows is an analysis, foreach main logistics function, of technological and managerial solutions whichenhance integration between persons, business functions, procedures, andcentral and local structures within the branded product industry (Table I). Inparticular referring to order management and inventory management,advantages gained from the use of computer-based information systemsmanagement are considered. Similarly with reference to warehousing andhandling, interventions of automation in managing physical flows withincentral warehouses are identified. As regards packaging and unitization,

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industrial concerns have to face the difficulty of reconciling the opposite needsof differentiated load units with the adoption of a computer-based palletizationsystem. Finally, referring to transport, the proposed solutions aim at the optimaluse of means of transport by ensuring full loads on return journeys.

Computer-based order-management systems in the branded product industry The order cycle for branded industry is strongly conditioned by the internalprocesses of order management and processing which start with data entry (in thecomputer system), and by product masters controls, by commercial conditions, byoverdraft facilities and by the availability of products, and end when picking listsare printed. At present the mean time of delivery of Italian producers is about sixdays and three of them are spent in order processing which has to get through aseries of verifications, controls and reworking before being definitively sent.Adopting lean procedures and reducing the number of errors can result in aconsiderable reduction in administrative time. The reduction of errors during theorder acquisition phase is the first prerequisite to speed up the whole process.

Leaving aside for the moment direct order acquisition from customer,subsequently analysed with reference to vertical integration, in the case of orderacquisition through salesmen (at present in Italy about 70 per cent of orders ofbranded industry are filled by salespeople), the use of two-way terminals allowson line verification of the accuracy and of the correspondence with the agreedconditions, and furthermore it eliminates data entry and control by hand. A

Technological and managerial solutionsBranded product

Functions industry Implications

Information flow

Order management Computer-based Reduction of orderorder-management cycle time and of

systems checking phasesInventory management Automatic inventory Improved service to customer

management systems and Stock reductionorganizational liaison devices Improved production planning

Physical flow

Warehousing Computer-based warehousing Reduction of errors in order assemblingMore speed in order assembling

Handling Computer-based warehousing More speed in pallet storagePacking and unitization Automatic packaging and Reduction/removing of packaging

unitization at end line for of unit loads in warehousesentire pallets and for sub-multiples

Transport Full loads in return journeys Reduction of global costs of primary transport

Table I.Technological and

managerial solutionsto improve integrationin branded industries

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second prerequisite is the computer-based and integrated management ofcontrols carried out concurrently with the order cycle[36]. The system has tohave the capacity to recognize authorized interventions, and likewise theresponsibility for the decision to release has to be entrusted on the operationallevel to persons with skills in the whole process of order dispatching.

Inventory management systems and organizational liaison devicesFinished product inventory management is the activity which connects thelogistics of distribution and the logistics of manufacturing in branded industry.The first fixes target stocks for each reference and it periodically signalsvariances and possible requirements; the second, starting from these data,prearranges medium-term production planning and it updates short-termschedules in order to reconcile market needs with resource availability andproduction efficiency[37]. Whether these two sub-functions are part of the samefunction or they are under different functions, the integration process is carriedout through continuous information exchange and through formal meetings orcommittees. The knowledge in real time of global stock for each product, withsales forecasts and order backlogs allows for the prearrangement and updatingof production plans. Information about stock size of each local warehouse andthe related order backlogs allows the planning of timely and correct producthandling from the central warehouse.

In order to improve the level of service to customer and at the same time toreduce finished product stock (the level of service of branded industry in 1994,in Italy, is on average 95 per cent with an average finished product stock coverof 15 days), industry should adopt computer-based procedures of managementand organizational liaison devices[38]. In this way it can improve the integra-tion, between production and distribution planning and, within the distributionnetwork, between central and local logistics structures (operational activitiesscheduling needs both medium-term and short-term forecasts. Businesscomputer-based systems and organizational liaison devices have to allow acontinuous dialogue between those functions which usually concur to make aglobal forecast of demand. The integration process therefore involves, besidesdistribution and production planning, also marketing and sales).

Computer-based warehousingThe tendency of branded industry to centralize the production of differentplants in a single warehouse and to deliver complete pallets produces the condi-tions necessary to use computer-based handling systems efficiently[39,40].Computer-based warehouses have stacker cranes between racking for storingand picking, roller conveyors and automated guided vehicles for ingoing andoutgoing handling. This system has an entry unit in which pallets are identifiedwith an optical scanner, loaded, and sent to the stacker crane picking area,where they are then stored in the prearranged position; likewise there is an exitunit where each pallet is connected to the order which originated its despatch.

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Computer-based warehousing is a solution to an integrated management ofinternal logistics activities from palletization and packaging to the dispatch ofloads. The high investment required by this solution is justified when highperformance in terms of receipt and handling capacity are required.

Packaging and unitization at end line for entire pallets and for sub-multiplesAutomatic unitization at end line both for entire mono-product or mixed palletsand for their sub-multiples[41], improves logistics integration betweenproduction plant, central and local warehouses. Furthermore in this waymanual reassembling of load units can be avoided.

The tendency to offer even more pallet sub-multiples and to improve the levelof service with mixed pallets requires research into computer-based systems forend line packaging of each size of load units with the aim of eliminatingduplication in pallet assembly, between plant and warehouse.

Full loads in return journeysTo have full loads in return journeys is a real opportunity for the producer toreduce the total costs of primary transport from plant, central and localwarehouses and transit-points. Until a body for transport management isformed in Italy, which can act as mediator between different institutions withinthe logistics system and which can in this way obtain full loads in differentdirections, this aim depends on the planning skills and level of internalintegration of each producer.

In short, industrial concerns adopt technological, managerial and organiza-tional solutions aimed at realizing close co-operation between productionplanning and distribution and, within the distribution network, betweeninternal and external logistics structures. This co-operation paves the way forthe subsequent phase of the process of logistics integration: a phase alreadyunder way that involves the relationship with commercial enterprizes and, inparticular, large-scale trade businesses.

Integrated logistics in large-scale trade businessThe different responsibilities given to logistics management and the diverseorganizational integration of this function correspond to the varied reality of tradebusinesses. In organization charts of large-scale trade business there is almostalways a logistics activity manager, but his position and his functions are oftendifferent in various businesses. Logistics can be found either between primaryfunctions which directly depend on top management or, with purchasing, salesand sales network, between functions subordinate to commercial management.

In general, independently from an organizational position, logistics manage-ment – in addition to taking long term decisions about new investments anddefining contracts with possible service suppliers – supervises centres ofdistribution management and all operational activities carried out in them, fromreceipt of products from suppliers to dispatch to points of sale (referring tocentres of distribution activities, logistics services mainly used by large-scale

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trade businesses are: transport, porterage, maintaining and extraordinaryrepairs of means of handling).

In these activities, in theory, inventory management should be included;nevertheless, for the majority of the examined cases this responsibility isseparated from the logistics function. This happens because inventorymanagement is closely connected to purchasing which is frequently organizedas independent and autonomous management with respect to logistics. Apartfrom the merely formal aspect, that is logistics management which does notmanage product stock and which has no hierarchic power, this situation impliesthat as a consequence the aim of purchasing management is, first, commercialopportunity (in terms of product price, discounts and premiums connected tosales drives) and, second, only when it is possible, stock reduction. Further-more, referring to the level of service to points of sale, the risk of being out-of-stock leads purchasing to over-size stocks rather than to reduce them. Theconsequence is a real loss of control of the aim of stock and understockreduction, and also a lowering of sensitivity towards those logistics integrationfactors between production and distribution which could simplify handling andstoring and make management more economical[42].

In these hypotheses the choices linked to inventory management came underthe responsibility of two business functions: first logistics, which supervisesorder management, transport, storage, internal handling and packaging with theaim of reaching the highest efficiency in operations, a high material turnover, anda high level of service; and second purchasing, which fixes quantities and times oforder filling, has control of product stock to centres of distribution and has theaim of minimizing the costs of product purchase (the last effect is a reduction ofpurchasing costs. This aim is reached first of all in the phase of drawing up of theannual contract of purchasing – through the negotiation of price list, of discountsand additional premiums connected to the quantities of a single order, to the totalvolumes achieved in the year and to the product assortment – second in the wayin which these opportunities are effectively exploited and in the way in whichbusiness obtains, out of contract, further facilitated offers for sale).

In order to improve business performance, logistics and purchasing have towork closely together and the activities of centres of distribution have to be closelyco-ordinated with those of the points of sale. In order to reach this aim, internalintegration can be enhanced by some technological and managerial interventions(Table II). In particular referring to order and inventory management, warehousingand handling, advantages gained from the adoption of computer-basedinformation management are considered. As regards packaging and unitization,trade businesses have to prepare orders so that paths for shelf replenishmentactivities at points of sale are optimized. Finally, referring to transport, theproposed solutions aim to optimize the use of means of transport through theaggregation of deliveries.

Computer-based systems of order management in large-scale trade businessOrder management is simplified in trade business because they receive requestsfrom their own points of sale (or affiliated points of sale) through their network,

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with the same modalities, daily and in prearranged hours. Therefore control ismore simple and it mainly concerns the formal correctness of orders. Thesubsequent phase is the automatic subdivision of requests to the appropriatedistribution centres and the control of product availability in them. Theprocessing finishes with the printing of picking lists and possibly of the list ofproducts not available in the warehouse.

Automatic reordering procedures from point of sale and from distributioncentresInventory management at the point of sale can be rationalized through the useof automatic reordering procedures. They replace the present manual pur-chasing processes, with orders filled by internal staff or by salespeople (inadvance sales or in direct sales), in which quantities of each article are definedthrough a sight check of product availability on the shelf (and in storagereception areas) and through an estimation, based on experience, of consump-tion in the lead time of purchasing procurement.

Through automatic reordering, based on fulfilment algorithms plus forecast,the order is filled by the system according to the shelf space forecast for thereceipt date of the goods.To do this the system has to manage inventory and spaceallocation (the fulfilment and forecast algorithm is more reliable for high turnover

Technological and managerial solutionsLarge-scale trade

Functions business Implications

Information flow

Order management Computer-based Reduction of orderorder-management cycle time and of

systems checking phasesInventory management Automatic reordering Reduction of the medium stock level

procedures from point of Reduction of out-of-stocksale and from distribution centres Reduction of human resources

for order fulfilment andstock control

Physical flow

Warehousing Rationalization of the Reduction of errors in order assemblingpaths of replenishment Assembling optimization of

at the point of sale courses for operatorsHandling Activity of centres of Improved distribution of the work

distribution managed with More speed in order assemblingradio-frequency

Packing and unitization Modalities of assembling Reduction/removing of product unit loads transfers between means of handling

Transport Aggregation of deliveries to More frequent deliveriespoints of sale

Table II.Technological and

managerial solutions toimprove integration in

large-scale tradebusinesses

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products which usually have a lower variability of sales; on the other hand for lowturnover products and for references with high variability of sales, it is better touse simple fulfilment or replacement algorithms for inventory managing). Theadvantages of automatic inventory management are the reduction in the averagestock level at the point of sale, the containment of out-of-stock situations on theshelves, and the cutting down of time spent by staff in reordering.

Inventory management in centres of distribution can be improved through theuse of automatic reordering procedures. In this way the help of computers inmaking order proposals, based on point of reordering algorithms (of quantity orof time) and economic order quantity, allows a re-highlighting of the buyer’sduties, from inventory management to product assortment, purchasing sourcesand promotions management, and finally it creates a new figure, the planner,who supervizes the operational aspect of the system. Furthermore the procedureshould not undertake reordering in terms of single code but in terms of productpoint of origin (that is the supplier or group of suppliers) in order to make themost of logistics discounts linked to the achievement of full loads.

In order to improve the trade-off between the average stock level and the levelof service to centres of distribution, it is necessary that the reordering systemrecognizes the available stock level at the points of sale, especially for lowturnover products (the level of service of centres of distribution, managed withmanual reorder systems, in Italy in 1994 was about 92 per cent with an averagestock cover of about 30 days; while centres of distribution managed withautomatic reorder systems, referring to the same period, had a level of service ofabout 95 per cent with an average stock cover of about 20 days). In fact often theshelf space is largely over the theoretical safe stock level; this reduces the risk ofout-of-stock situations at points of sale and it allows the removal or thereduction of safe stock levels in centres of distribution. In other words the globaloptimization of inventory management in large-scale trade requires a closeintegration of activities between centres of distribution and points of sale.

Activities of centres of distribution managed with radio-frequencyThe logistics activities of handling and storing within centres of distribution, atpresent are carried out by hand with the help of handling machines, but withrelatively low investment they can be managed in real time by a computer,through a network of radio terminals.

Receivers, in fact, can work with portable radio terminals and optical scannersso they can make checks on goods entry and inventory data guided by themainframe through interactive communication. The receiving phase ends withthe application of labels with bar codes and progressive numbers to the pallet; thefork-lift truck operator reads the internal pallet code with a laser scanner and hereceives on his video terminal the specifications of the article and its location. Theconfirmation of the allocation which makes that pallet available for picking ismade through the optical scanning of the storage location.

For the preparation of the order the picking truck operator has a video-terminal where he can see the picking list with quantities, client, roll-container

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destination number, and article position. The operator reads by laser thepicking position code to pick up the required cartons and obtains aconfirmation or an error signal if he or she is wrong.

The warehouse situation is constantly updated on the computer and whenthe stock in picking position is zero, the system sends the request for theremoval of the pallet from its storage position to its picking position to the truckoperator’s terminals with the indication of the positions where they can pickpallets and where they have to put them.

The main characteristic of the radio-frequency system is that all phases arecarried out in real time so they allow the co-ordination, the integration and thecontrol of all handling and storing activities. The advantages are stockreduction, the elimination of errors, the optimization of internal paths and thespeeding up of activities.

Modalities of assembling unit loadsThe modalities used by centres of distribution in order to form unit loadsinfluence shelf replenishment at the point of sale. The sequence of goodsallocation in retainers or roll-containers should be established not only in orderto optimize the phases of preparation but also with the aim of simplifying thenext phases of picking and shelf replenishment. The advantage is theelimination of useless goods transfers from roll-containers to other means ofhandling and to rationalize the paths of replenishment at the point of sale,reducing, in this way, time and costs.

The above mentioned remarks are reinforced if automatic reordering is used:space availability on the shelf when products are received creates the conditionand the necessity, (a delay in the shelf replenishment would produce an out-of-stock situation), at the same time, rapidly to allocate products avoiding theirbeing kept in the receiving areas for days. (Unloading areas in points of saleoften become intensive and untidy storing areas. The visual management ofthis warehouse is one of the causes of errors in manual reorder systems.)

Aggregation of deliveries to points of saleMulti-deliveries from the centre of distribution to the points of sale is a solutiongenerally used by large-scale trade businesses. It improves the level of service topoints of sale with a minimum increase in transport costs. Aggregation allows,in fact, the removal of the constraint of minimum order imposed by the need forfull loads and frequent deliveries. The reduction of purchasing lead time is thecondition for optimizing product stock at the point of sale.

The reality of large-scale trade businesses shows in many cases, both in theorganizational chart, and in operational management, a low level of co-ordination between logistics functions. As a consequence service performance,efficiency of activities and investments in working capital are not the best.While these conditions were negligible in the past, when trade business workedin situations of high return, changes in the competitive scenario now demandmore efficiency and productivity at least in those activities which represent the

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operational system of large-scale trade businesses: purchasing, warehousing,distribution. Integration is the basis for obtaining this improvement.

Vertical logistics integrationVertical integration is about the co-operation between institutions placed atdifferent levels of the channel; in particular in this paragraph attention isfocused on the two main institutions: the producer and the distributor.

A closer integration of physical and information flows between producersand distributors can lead to the improvement in the trade-off between level ofservice and average stock. Afterwards some kinds of intervention are analysed,and are grouped according to the six logistics functions carried out within thechannel (each suggested intervention has been related to the logistics functionmore directly involved, obviously this does not mean that an intervention cannot improve more than one function). In particular the function of ordermanagement can be improved by using the telecom-network for thetransmission of documents; inventory management and control can be moreeconomical with the implementation of the continuous replenishment system;warehousing and handl ing are modified with the cross-docking method;packaging and unitization are involved through the standardization of palletheight and, finally, the function of transport can be optimized with multi-deliveries and a more rational use of couriers. In Table III the proposedinterventions and the related implications are shown.

EDIReferring to the function of order management one of the most significantinterventions is the choice of a common standard for documents like orders,order confirmations, dispatch notes, invoices, price lists and the adoption of EDIfor their transmission; this kind of solution produces a great reduction in datainterchange errors and a considerable reduction in administrative time[43,44].

Nowadays in Italy both distribution and manufacturing companies areplanning to use EDI in the near future, (unlike what happened in otherEuropean countries, in Italy, EDI is not yet a widespread operational procedure;nevertheless about 70 per cent businesses of branded industry and large-scaletrade are developing this technology), some of them are already in thedevelopment phase, but up to now they have only considered the exchange ofinvoices, bills and order confirmations; the potential of this facility is actuallymuch higher. At the same time it is very important to use e-mail (in Italy up to1994 experiences of e-mail between manufacturers and distributors have notexisted). In fact while for regular and repetitive processes based on structuredinformation, standardization and EDI are the best solutions for fast, clear, exactand reliable communication; when the exchange involves human decisions, e-mail is particularly important. The main advantages of e-mail with respect totraditional communication systems (telephone, fax) are speed, operational costreduction and an increase in interactive reliability. The regular use of facilitieslike EDI and e-mail for eliminating errors in order transmission and for

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increasing timeliness leads to an improvement in the level of verticalintegration between branded suppliers and distributors.

Continuous replenishmentContinuous replenishment is an inventory managing system in whichproducers always send full loads to centres of distribution, but the mix of eachload is fixed a short time before departure, according to the principle ofreplenishment of a prearranged level of stock.

In particular two kinds of continuous replenishment can exist depending onwho makes the order: the distributor or the supplier; in the last case it is better touse the exact expression of vendor managed replenishment system (VMRS). Inthe first case the distributor makes the order on the basis of the outgoings andthe stock level of the centre of distribution and periodically sends to the producersales forecasts or provisional orders (these orders are afterwards confirmed withthe actual order in a fixed time), for a future prearranged period (Figure 2).

ImplicationsType of Branded product Large-scale trade

Functions intervention implications business

Information flow

Order management EDI Reduction of errors of Reduction of errors oftransmission transmission

Reduction of delivery time Reduction of order cycleInventory Continuous Stock reduction Reduction of costs ofmanagement replenishment Out-of-stock reduction inventory management

Improvement of productionplanning

Physical flow

Warehousing Cross-docking Elimination of local Reduction of stockwarehouses Elimination of centres of

Handling Cross-docking distributionPackaging and Pallet standardization Elimination of Elimination ofunitization Definition of sub- re-palletization re-palletization

pallet size Assigned stands in PoS Less time for orderDefinition of the number Less time for packaging setting

of consumer units per Possibility of ordering Reduction of packagingcarton the economic quantity costs

Transport Multi-drop and Reduction of costs of Reduction of costs ofmulti-pick transport transport

Rationalization of the Reduction of delivery time Reduction of deliveryuse of couriers Reduction of costs of lead time

transport Elimination of lines ofvehicles for unloading to

centres of distribution

Table III.Interventions of vertical

integration betweenbranded industry and

large-scale tradebusiness and connected

implications

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In this way suppliers can undertake more reliable production and primarydistribution planning.

The main pre-condition for adopting this method is the distributor’s ability togive reliable sales forecasts. In fact if real sales exceed the forecast, an out-of-stock situation occurs with damage to both producer and distributor, while inthe opposite case the stock of the supplier increases.

In VMRS, it is the producer who establishes quantities on the basis of hisknowledge of the outgoings from the centre of distribution, of the stock stillpresent and of the orders already sent in from points of sale, according toprearranged resupply programmes (Figure 3). In this case the responsibility forthe supply is on the producer who, however, acts according to agreed rules ofbehaviour and management. The task of ensuring the continuity of the flow ofinformation to enable the producer to have all the elements necessary to putforward order proposals and make forecasts is entrusted to the distributor.

Figure 2.Description of the mainflows of informationbetween producer anddistributor in continuousreplenishment managedby distributor

Producer Distributor

• Purchase order• Forecasts of outgoings from centre

of distribution

Order confirmation

Figure 3.Description of the main flows ofinformation betweenproducer anddistributor in vendormanaged replenishmentsystem

Producer Distributor

• Stock• Outgoings• Order from point of sales

Order confirmation

Order proposal

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In both cases close co-operation between branded industry and distributionwhich may lead to the exchange of information and to agreements on deliverydates and on levels of stock in the centres of distribution is fundamental. Otherelements that favour the functioning of continuous replenishment are: effectivecoding of packing units and load units, the adoption of automatic reorderingprocedures and the use of EDI and e-mail for a fast exchange of informationbetween the two institutions.

The main advantage for suppliers is the improvement of production planningand as a consequence the decrease of both average stock and out-of-stockconditions, and the improvement of the efficiency of distribution planning;while distributors gain reduction of average stock and an improvement in thelevel of service at entry.

Cross-dockingThe cross-docking method[45] consists of a large marshalling area on whichseveral producers’ and distributors’ vehicles converge and in which pallets aremarshalled between different points of delivery (centres of distribution orpoints of sale) (Figure 4).

In the marshalling area it is possible to have whole pallet handling, mixed pallethandling with picking by supplier, and package unit handling with picking onthe platform.

The logic is to despatch based on the requests from point of delivery, sogoods are in transit for only a short time and the stock (when present) is simplyreduced to a small buffer in order to optimize the load from producer tomarshalling area. The solution with picking on the marshalling area does notcreate stock because goods are immediately de-palletized and re-palletized.

Three different solutions for cross-docking can be proposed, depending onthe outgoing load destination:

Figure 4.Description of physical

flow in cross-docking

Point of delivery1

Producer 1

Marshalling area

Point of delivery2

Producer 2

Point of delivery3

Producer 3

Point of deliveryn

Producer n

Physical flow

Point of delivery1

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(1) load destined for the points of sale of a single distributor;(2) load destined for different distributors’ centres and hypermarkets;(3) load destined for different distributors’ points of sale.

In each case the main constraints on development are to:• balance ingoings and outgoings in order to have full loads,• reduce supplier’s delivery time, and especially• synchronize arrivals and departures.

When cross-docking is at a single distributor’s centre, the elimination of storageactivities is obtained (with the exception of the small buffer) because ingoingpallets are immediately marshalled between different vehicles directed to thepoints of sale. This solution can best operate if both supplier and distributorhave good forecasting skills and they frequently exchange information. Cross-docking with delivery to different distributors (centres of distribution,hypermarkets or points of sale) is a bit more complex because horizontal co-ordination between distributors is also required. In fact they have to sharedecisions such as:

• choice of marshalling area manager and activities,• definition of delivery frequency,• attribution of quantities that can be ordered by each distributor.

The three proposed solutions represent the evolution from push logic,characterized by a pushed flow which produces stock, to a pull approach which,because of a tense material flow, allows for the elimination of stock. Inparticular the first solution derives from traditional centres of distribution, thesecond from multi-suppliers’ warehouses while the third can be considered asevolving from a multi-distributor’s centre of distribution (actually multi-distributor warehousing can be uneconomical when costs of joined inventorymanagement overcome savings derived from the elimination of the transportfrom the nearest mono-distributor warehouse. With cross-docking this problemdoes not exist because stock is reduced to a little buffer which has lowermanagement costs).

Pallet standardization, sizing of sub-pallets and definition of the optimumnumber of consumer units per cartonThe extent of interventions linked to packaging and unitization is representedby: pallet standardization, sizing of sub-pallets and definition of the optimumnumber of consumer units per carton. Pallet standardization concerns both theheight and the composition of the pallet. At present in Italy some distributioncompanies ask for a personalized arrangement of package units on pallets, sosuppliers have to arrange pallets by hand and vehicles often travel not fullyloaded. An agreement between producers and distributors has to be made inorder to establish a standard arrangement of package units on pallets.

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With reference to pallet height, it should be noted that no standardizationwhatsoever exists, so when producer and distributor make a contract, the onewho has more bargaining power, establishes the dimensions, the other assumesthe cost of the adjustment (the cost of the adjustment exists only if client andsupplier use different operational standards). Obviously this cost falls to theconsumer through an increase of the product price.

The establishment of a few standard heights according to productcharacteristics allows the removal of the cost of re-palletizing while, in the shortterm, the constraint on this is the need to adapt all warehouses to theestablished heights. At present pallet sub-multiples used in Italy are box-palletsand demi-pallets. They are metal cages or cardboard boxes with plastic feetwhich allow consumers to take out goods directly. With their use the distributorcan speed up the order preparation (box-pallet and demi-pallet correspondrespectively to a quarter of a pallet and half a pallet. They allow the distributorto move a global number of articles with only one operation which wouldotherwise be distributed in several package units), so handling costs decreaseand shelf replenishment at the point of sale is eliminated completely.

Obviously box-pallets and demi-pallets, when used , are the minimumpurchase lots for the points of sale (pallet submultiples at present, in Italy, areused in promotions. The packaging by cartons is always used by producers andit is the minimum assemblage of products. Therefore in promotions, which areeven more frequent, box-pallet and demi-pallet are the minimum lot, whilenormally the minimum quantity is always the carton). Advantages forsuppliers are essentially a better penetration of markets because of thepossibility of using promotional space and less time for preparing orders if anautomatic packaging system is used.

Finally an agreement between branded product industry and distribution onthe definition of the optimum number of consumer units per package can beuseful. The package unit is usually the minimum purchase lot for the points ofsale, therefore the definition by distributors of the minimum number ofconsumer units to put in it can allow industry to give a better service and, if thisnumber is higher than that presently used, also to reduce the cost of packaging.

Multi-drop, multi-pick and rationalization of the use of couriersTransport can be more economical with the adoption of multi-drop, multi-pickand the rationalization of the use of couriers. Multi-drop is the aggregation,made by the producer, of different distributors’ orders in a single vehicle, whenpoints of delivery are in the same geographic area (Figure 5). Multi-pick is thepicking, from different producers in close proximity to each other, of goodsdespatched to a single point of delivery (Figure 6).

Both types of intervention imply a decrease of transport costs because of fullloads, on the assumption that a limited number of daily pickings/deliveries inthe same geographic area will be made and dates and times for differentinstitutions (if we consider the working hours only about four deliveries/pickings per day can be made, therefore in order to optimize loads in vehicles

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the minimum number of pallets for delivery/picking is more than six. This is allunder the hypothesis that the time between two subsequent deliveries isreduced to two hours) can be correctly planned.

Finally, still with reference to transport, significant savings can be obtainedthrough the rationalization of the use of couriers to whom producers go whentheir deliveries are so small that the use of one vehicle is not economical.

Obviously couriers too want to fill their vehicles, so they wait in order toconsolidate a sufficient number of deliveries. This fact causes a lowering of thelevel of service in the branded product industry with respect to distribution, interms of time of delivery. A possible solution to this problem is to fix, in relationto the orders for each distributor, the same day of delivery for all producers whouse the same courier, so that their deliveries can be aggregated. In this waydelivery lead time can be reduced and unloading activities at centres ofdistribution can become streamlined.

Horizontal logistics integrationHorizontal integration is the co-ordination between institutions placed on thesame level of the distribution channel. In the light of this definition some areaswill be analysed in which more co-operation between producers anddistributors is necessary in order to improve vertical integration and globalperformance in the channel. While a lot of the above analysed solutions can be

Figure 5.Description of coursesof vehicles in multi-drop

Producer

Sto

ck

Point ofdelivery 1

Point ofdelivery 2

Point ofdelivery 3

Point ofdelivery 4

Figure 6.Description of coursesof vehicles in multi-pick

Point ofdelivery

Producer 1

Sto

ckProducer 1

Sto

ck

Producer 2

Sto

ck

Producer 3

Sto

ck

Producer 4

Sto

ck

Producer 5

Sto

ck

Internal, verticaland horizontal

logistics

81

implemented simply through one-to-one co-operation, the following hypothesisis strongly conditioned by close horizontal collaboration, so that the transitionto solutions of vertical integration produces many-to-many relations.

The suggested intervention areas are distinguished according to the logisticsfunctions carried out in the channel (Table IV); in particular relating to ordermanagement, two kinds of standardization are identified, the first regarding theinformation content of documents, while the second refers to the interface ofapplication systems.

As regards inventory management, branded industries have to adopt thesame standard for bar-coding consumer units, cartons and pallets and theyhave to respect the chosen standards. Distributors, on the other hand shoulddefine economic order quantities and frequency of delivery to centres ofdistribution and points of sale, and they should improve the performance oftheir automatic re-ordering systems.

Warehousing and handling are involved when the industry chooses to usemulti-producer warehouses and/or when distributors judge it appropriate toavail themselves of multi-distributor centres of distribution.

Intervention of horizontal logistic integrationFunctions Branded product industry Large-scale trade businesses

Information flow

Order Standardization of computerized Standardization of computerizedmanagement document content document content

Standardization of application Standardization of applicationsystem interface system interface

Inventory Standard code choice for Definition of economic order quantitymanagement consumer units, cartons and frequency

and pallets Improvement of the automaticreordering system

Physical flow

Warehousing Multi-supplier warehouse Multi-distributor centreHandling Multi-supplier warehouse Multi-distributor centre

Packaging and Pallet height standardization Definition of the number of consumerunitization units per carton

Definition of pallet sub-multiplesStandardization of cartonarrangement on pallets

Transport Co-ordinated multi-pick Co-ordinated multi-drop

Proposal regarding the aggregation of suppliers to a courier and the choiceof a common courier

Table IV.Interventions of

horizontal integrationbetween branded

industries and betweenlarge scale trade

businesses

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82

Interventions related to packaging and unitization are, for the industry, thestandardization of pallet height, while for the distributors they are thedefinition of the number of consumer units per carton, and the standardizationof carton arrangement requirements on pallet.

Finally transport is involved when distributors adopt co-ordinated multi-pick and/or producers adopt co-ordinated multi-drop and with respect to theaggregation of suppliers to a courier and the choice of a common courier. Eacharea of intervention will be described below, in the light of the above mentionedimprovements in vertical integration performance.

Standardization of computerized document content and of application systeminterfaceWith reference to order management, the use of EDI in order to have a fasterand more precise information exchange between producers and distributorspresupposes the same standard[46] format and the same clearing house[47].Interface problems between different standards can often be solved butinevitably imply cost increases.

Horizontal agreements between producers with a view to making commonchoices on communication technologies and document types and character-istics can lead to substantial savings. Furthermore if common requirementsabout numbers and kinds of messages to be standardized are also highlightedin the distribution sector, the transition to vertical integration is undoubtedlymore effective. However EDI is only the hardware component of communicationbetween companies, that of software is a re-engineering of processes and ofcomputer systems and a profound change in the relationship between firms,based on an increasing degree of vertical and also horizontal co-operation.

Standard code choice for consumer units, cartons and palletsThe main elements of agreement between producers concern the choice of astandard code for consumer units, cartons and pallets and conforming to thenorms of the chosen standard. In fact if standardization between suppliers didnot exist, distributors would have to adopt more complex, slower and moreexpensive inventory management hardware and software, or they would not beable to use coding for speeding up and rationalizing storage operations.

In particular the greater complexity is due to the need to overcome thedifficulty of code diversity by resorting to the translation of the different codesinto a single internal code which facilitates stock management; furthermore whenoptical scanners are used in product loading operations in the warehousecomputer, a more flexible instrument for managing different codes has to be used.

At present a standard code exists, EAN, which includes a series of differentcoding methods according to the quantity and kind of information to be relayed.Particularly interesting is the UCC/EAN 128 system, which has the capacity toinclude a great deal of information in the code, from lot number and due dates,to number of references per carton and their contents in the appropriate unit[48].

This system can link physical flow and the flow of information, so it is animportant tool of communication, especially if used in synergy with EDI[49].

Internal, verticaland horizontal

logistics

83

Economic order quantities and frequencies, and improvement of the automaticreordering systemAmongst distributors it is important that agreements about economicquantities and delivery frequencies to centres of distribution and points of saleexist with a view to the adoption of VMRS, in fact based on the knowledge ofoptimum order lots and re-ordering intervals, producers can make more preciseforecasts about expected consumption and as a consequence they can supply abetter service making more reasonable and economical order proposals.

With reference to continuous replenishment based on order management bythe distributor, it is very important to use automatic re-ordering systems;distributors have to combine their experience and thus compare theirrequirements to establish what features the new system should have in order tosecure a high level of performance.

Multi-supplier warehouseWith reference to warehousing and handling, producers, especially those withmedium-low delivery volumes, can choose to adopt a multi-suppliers warehousein order to remove stock from end line and keep a storage point for thereplenishment of centres of distribution and hypermarkets. Furthermore in thisway transport cost decreases because with delivery aggregation, a full load isfacilitated.

For the effectiveness of the multi-supplier warehouse, producers have toreach agreement on space allocation, inventory management procedures andtools, warehouse load-shifting vehicles, personnel selection and departurehours and intervals of means of transport. A reasonable solution is to delegateall warehouse management activities to a “super partes” logistics servicesupplier. However close horizontal co-ordination between manufacturersregarding space allocation and inventory management procedures is stillnecessary.

Multi-distributor centresDistributors can choose to share the same warehouse when sales volume is nothigh enough to justify the opening of a regional centre of distribution. In factcosts incurred in utilizing a multi-distributor centre can be lower thantransport costs to points of sale from the nearest centre. In this case a closehorizontal co-operation is necessary because each distributor stores his owngoods, furthermore price and sales conditions are not the same for everyone, sothe stock of each article has to be separated for accounting purposes. For thisreason two kinds of inventory management are necessary: global for fiscalreasons because the warehouse is a business, and individual for eachdistributor essential for correct inventory management. The two systems haveto be linked, but each distributor is allowed to know only the storageparticulars relating to his products. Obviously, for reasons of confidentiality, alogistics service supplier, agreed by all the distributors, has to be entrustedwith the warehousing management.

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Pallet height standardizationReferring to packaging and unitization, pallet height standardization requiresco-ordination between producers. It is not reasonable to think of a stabilizingonly one height because of the different turnover and physical characteristics(weight, volume, fragility, stability).

A possible solution can be to fix some standard format according to theabove mentioned characteristics. In particular for low and medium turnoverproducts single-layer pallets or half-pallets respectively can be used; while forhigh turnover products the whole pallet has to be used, the height determinedby the physical characteristics.

For all these reasons clear agreements are required between producers aboutthe number and value of standard heights also bearing in mind the need for fullloads.

Definition of the number of consumer units per carton, of pallet sub-multiplesand standardization of carton arrangement on palletDistributors have to reach agreement to define, according to the outgoings fromdifferent points of sale, the optimum number of consumer units per carton sothat an economic order quantity can be defined, which takes into account theneeds of different distributors. Furthermore it is very important to reachagreements on the size of pallet sub-multiple.

Another important aspect of standardization is the carton arrangement onpallet, in fact often some distributors request cartons arranged at the fourcorners of the pallet, or others ask that an empty space be left in the centre inorder to speed up entry controls.

Obviously such irregular requests oblige producers not to use automaticpalletization or to limit their use and to arrange pallets by hand. Clear ad hocagreements between distributors, on adequate pallet coding and loadcertification would undoubtedly solve this problems.

Co-ordinated multi-pickWith reference to transport, producers, in order to exploit advantages fromfrequent and shared deliveries, make agreements to realize the so called co-ordinated multi-pick, that is subsequent pickings at fixed dates and co-ordinated hours so that loads are synchronized.

Even in those situations there must be a close co-ordination betweenproducers regarding delivery volumes, in fact prearranged ranges within whichalso distributors have to contain their orders are necessary. Unloading time hasto be adequately gauged so that subsequent pickings hours can be respected;furthermore dates within which distributors have to order correct loadplanning have to be established.

Co-ordinated multi-dropIn some cases distributors can ask common suppliers to make multi-deliveriesin a particular area. This distribution method is called co-ordinated multi-dropbecause the proposal derives from coordination between distributors. In this

Internal, verticaland horizontal

logistics

85

case they have to order at a prearranged date and to respect a prefixed range ofquantities; likewise deliveries have to be done on the same day and at co-ordinated hours.

Consolidation of different deliveries can be previously fixed in order to makethe system more simple to manage. Furthermore with a high level ofcollaboration between distributors, orders can be sent to manufacturers onprearranged dates and at agreed times of delivery. Each receiver obviously hasto unload within the fixed time in order to respect subsequent delivery times.

Finally, if distributors make agreements about the extension of openinghours at centres of distribution, overall performance could be considerablyimproved.

Proposal regarding the aggregation of suppliers to a courier and the choice of acommon courierStill with reference to transport, another intervention can be suggested, thesuccess of which is directly influenced by horizontal co-ordination betweenproducers and distributors: the aggregation of suppliers to the same courier.Sometimes distributors quite near to each other can suggest that their suppliersuse the same courier in order to have full loads, to improve levels of service andto have a reduced tariff from their logistic service suppliers.

The need for horizontal integration is due to the fact that the proposal canderive exclusively from regional co-ordination between distributors, in fact onlythey are able easily to identify the producers which, in their area, use couriers.Likewise suppliers have to be co-ordinated in order to choose the best courierand to exert bargaining power that will allow them to re-negotiate rates withservice suppliers.

ConclusionsLogistics integration has been analysed referring to vertical and horizontalrelationships between the different institutions of distribution channel andconsidering both functional and organizational relations inside each institution.Industrial concerns and trading businesses are the main actors in thedistribution process, together with trucking firms and to a large extent, with allfirms which supply logistics services.

In the present work the analysis has been limited to groceries and, moreparticularly to the behaviour and the organizational choices of the brandedproduct industry and of the large scale retail trade.

The integration of internal logistics activities in each of these institutions,considered separately, and horizontal integration between institutions locatedon the same level of the channel are the pre-conditions for setting up a verticalintegration programme. The main functions directly involved in this processare, for industrial concern, production planning and distribution, and for tradebusiness, purchasing and distribution.

Both for producer and for distributor achieving excellent performances in alllogistics functions – order cycle time reduction, optimization of inventorymanagement, reduction of storage locations and of material handling,

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rationalization of transport, of packaging and of unitization – depends, first ofall, on a clear internal attribution of responsibility to the managerial areasinvolved in the logistic process and on the quickness of their processing andexchange of information, second on vertical integration between the twoinstitutions.

Referring to the above analysed interventions of integration betweenindustry and distribution (Table V), EDI produces good results when thebackward and forward phases of the transmission are computer-based; likewisecontinuous replenishment presupposes that the distributor, through acontinuous co-ordination between stock accounting and physical management,gives reliable data to producers who have to produce what the market requiresfrom time to time; to implement cross-docking delivery, lead time has to becontained in 24-48 hours and the distributor has to collect, process and despatchquickly and in aggregate form the exact requests of the points of delivery; inorder to carry out mono-product or pluri-product box-pallets and demi-palletsand to fix standard heights per type of product it is important to do acontinuous analysis of product turnover to correctly establish mix and quantity,and it is also important to have end line flexible packing systems which canalways meet different market requirements; finally referring to multi-drop andmulti-pick, the distributor has to plan his receiving activities well includinglimiting the waiting time of the transporter and the loading, control andacceptance operations to one hour, while the producer must always have allproducts at his disposal in order to make full loads on the basis of thecustomer’s requests.

All vertical integration interventions presupposes, in other words, thatinstitutions have already developed, internally, organizational and technologi-cal solutions to assure a systematic co-ordination of physical flow and the flowof information between the managerial areas involved. Internal integration isthe first prerequisite for business to achieve high logistics performances bothindividually and globally in the channel. To produce high synergy in verticalintegration a second prerequisite is needed: a horizontal co-ordination betweeninstitutions. Liaison and information exchange between branded industry andlarge scale trade has been carried out, up to now, essentially through thenegotiation process of purchasing-selling and it concerns almost exclusively therespective functions.

The importance assumed by logistics costs on global interface costssuggests, for the near future, a relationship between industry and distributionthat goes beyond the basic connection between sales and purchasingorganizations, but also that directly involves merely logistic structures. The aimis not only to reduce the incidence of these costs of interface but above all tosimultaneously improve the level of service.

Vertical integration, between the institutions of the channel, can be achievedif industry and distribution make common choices about some critical factorsfor the modalities of carrying out logistics activities. The process is alreadyunderway.

Internal, verticaland horizontal

logistics

87

Tech

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and

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use

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the

of c

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aggr

egat

ion

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uppl

iers

aggr

egat

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of s

uppl

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to a

cou

rier

and

the

choi

ceto

a c

ouri

er a

nd th

e ch

oice

of a

com

mon

cou

rier

of a

com

mon

cou

rier

Table V.Interventions of internal,

vertical and horizontallogistic integration

IJPDLM26,9

88

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38. Galbraith, J.K., Designing Complex Organizations, Addison-Wesley, Reading, MA, 1973,pp. 113-5.

39. Stock, J.R., “Managing computer, communication and information technology strategic-ally: opportunities and challenges for warehousing”, Logistics and Transportation Review,Vol. 26 No. 2, 1990, pp. 32-54.

40. Oxley, J., “Making warehouses work more efficiently”, Cooper J (Ed.)., Logistics andDistribution Planning, Kogan Page, London, 1994, pp. 184-94.

41. Wills, G., “Packaging as a source of profit”, in Gattorna, J. (Ed.), Insights in LogisticsManagement, MCB University Press, Bradford, 1985, pp. 133-60.

42. Bellandi, G., Caputo, M., Mininno, V. and Resciniti, R., “Logistica integrata nelladistribuzione dei beni di largo consumo: analisi delle soluzioni organizzative”, Atti delWorkshop AiIG, Torino, 23 June 1995, pp. 374-405.

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43. McKinnon, A.C., “Electronic data interchange in the retail supply chain”, InternationalJournal of Retail & Distribution Management, Vol. 18 No. 2, 1990, pp. 39-42.

44. Raney, M.A. and Walter, C.K., “Electronic data interchange: the warehouse and supplierinterface”, International Journal of Physical Distribution & Logistics Management, Vol. 22No. 8, 1992, pp. 21-6.

45. La Londe, B.J. and Masters, J.M., “Logistics strategies for the USA”, Cooper J. (Ed.),Logistics and Distribution Planning, Kogan Page, London, 1994, pp. 135-51.

46. Standardization requires the co-ordination in details of type and format of documents to beexchanged. At present the more used international public standard is EDIFACT(Electronic Data Interchange for Administration Commerce and Transport), but manyother standards exist that are used in particular sectors, for example ODETTE(Organization for Data Exchange by Tele Transmission in Europe) in the automobilesector or CEFIC (European Council of the Chemical Industry Federation) in the chemicalsector.

47. A clearing house is a service provider which acts as an electronic mail-box so it takes dataand holds them until the destination is ready for reception. Furthermore it translatesprotocols and formats documents according to the standard so it can solve the problem oftalking between different computers. At present in Italy two main clearing houses work:GEIS. (General Electric Information System) and INTESA (TElecommunicationINitiatives for Application Services).

48. Centre per la diffusione del sisteme EAN (Indicod), Specifiche tecniche codice a barre EAN,Milan, 1995, ch. 18, pp. 1-16.

49. Carter, J.R. and Ragatz, G.L., “Supplier bar codes: closing the EDI loop”, InternationalJournal of Purchasing and Materials Management, Vol. 27 No. 3, 1991, pp. 19-23.

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