logistics, retail and regions

2

Summary

Conseo

Introduction

Serge Rivet

10+ years of experience in logistics in CIS : - 3PL, Supplier logistics, Retail logistics, Logistics

Consulting

A work with major companies , among them : - FM Logistic, Kuehne + Nagel, Mosmart

Key projects led : - Warehouse management , Warehouse transfers , Co

Manufacturing, Cross Docking, Activity Based Costing, investment projects, Productivity Management, WMS, Transport Management, Logistics planning

Involvement in several initiatives : • Founder of the Eastern Europe Logistics Community • Co-creation and active participation to the ECR logistics working group

-  Logistics Projects Management

-  Consulting & Strategic support

-  4PL

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4

Introduction

16,995,800 sq km

A. State of Retail In Russia a quick overview

…

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History of Retail in Russia

Soviet Style Retail

1994 : First retail chains appearing in Moscow

1998 : Russia’s Default

2001 : coming of 1st big foreign Retailers

2004 : Visible Regional Retail Expansion

• 1% Of the Moscow Retail • 0% of Russian Retail • Great part of imported products • Expensive Prices

• Sadko Arkada ‘s margins = 100 – 200 %

• Almost no Self Service • Foreign companies take over Eastern Europe Retail Market but do not touch Russia

Great impact onto retail market • Re-orientation towards discounter format • Re-orientation towards National Products (development of foods product industry) • As a result, in 2000, most of the today’s big players and formats are already created

• Moscow shows mainly super and hypermarket development • ST Petersburg shows mainly discounters

• The Relationship between the retailers and suppliers turn to retailers advantage • Did not accelerate the coming of foreign retailers

• Metro, Auchan, Ramstore, Ikea, • No Tesco, No Carrefour, No Casino, No Ahold, No WalMart

• Appearing of local regional operators (magnit, MDM, Edelweiss, …)

• Retails becomes a real economic sector, with its rules, trends and players • Retail becomes a consumption habit on federal level

Remarks : • The entry ticket to the retail market gets more and more expensive for new retailers, as big players has already come and developed infrastructure (Specialists, Logistics, Regional Network, etc..) • The next solutions to enter are mainly :

• Development of new formats, underdeveloped in Russia • Acquisition of existing networks (Federal or Regional) • Franchising

• State Monopoly • Recurrent deficit • Small assortment • No import • Small Formats • Specialized Formats

Source : Renaissance Capital

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Main trends in Retail / The expansion time has come

Windows of opportunity Analysis (Based on GRDI ranking for 1995 – 2006)

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Main trends in Retail / Evolution of formats

Others Convenience Store

Discounters

Supermarket

Hypermarket

Differentiation of formats

Net increase of Hypermarkets to expects Convenience Stores to grow

Net increase of Federal Networks through

• Regional Expansion • Merger & Acquisitions • Alliances

Source : Renaissance Capital

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In maturing market

What is in the distribution pipe line ? •  consumers begin to spend more on non-food

items •  larger product variety with more outsourcing

from overseas

In developing market

What is in the distribution pipe line ? •  Consumer focuses onto basic products :

enhancing the bottom of the Maslow Pyramid •  FMCG •  mainly foods oriented business

Main trends in Retail / Globalizing Market

The development of overseas flows is of great importance for the future of Logistics as :

• Russia is a transit zone between Asia and Europe • Russia is to enter the WTO

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B. Impacts onto logitics

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Multiplicity of Formats involves

•  Complexity of logistics –  Van deliveries vs rail deliveries –  Fresh product chain vs dry product chain –  Different seasonality –  Pallets pick vs unit pick

For instance :

The hypermarket’s impact: -  Massive consolidation of volumes to expect -  Explosion of the quantity of SKU’s to manage

Convenient Stores impact : -  Capilarisation of Logistics

»  Small deliveries »  High mix

-  High speed and high quality deliveries expected

New technologies will be necessary for managing complexity :

• Hardware technologies : Radio Scanners, Rfid, Automatization … • Software Technologies : Warehouse Management Systems, TMS, EDI …

Impact # 1 : Complexity issues

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Impact # 2 : Capacity issues

Scaling up openings:

•  Permanent increase of the logistics capacity

The development of a regional Infrastructure is vital for new regional challenges :

• Warehouses • Air, Road, Rail, Sea,

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Impact # 3 :. Forecast issues

Scaling up openings:

•  Companies permanently reevaluting future

•  Lack of visibility for future

"Prediction is very difficult, especially if it's about the future."

Nils Bohr, Nobel laureate in Physics

• A New function will be at the heart of Logistics in Russia : Demand Planning, Capacity Planning, Distribution Requirement Planning • New Software Technologies : Statistical tools, advanced, demand planning, (Manugistics, I2, …)

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Impact # 4 :. Strategic Network Management issues

Apparition of network problematic

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New scales of retail / From Logistics Points …

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New scales of retail / From Logistics Points … to Chains

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Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Store

Store

Store

Store

Store

Store

Store

From Points to Chains / New technologies to set up

Supplier

Supplier

Supplier

Store

Store

Store

Cross- Docking Terminal


Supplier

Supplier

Supplier

Supplier

Store

Store

Store

Store



Cross Docking and consolidation center

• greatly decreases the quantity of transactions between suppliers and stores • Allows to ship far small quantities

These techniques became VITAL in the west

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Impact # 5 :. New Creative approaches to supply

$$$

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safety stock safety stock safety stock

Impact # 6 :. New Risks : Bullwhip effect

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Impact # 6 : New Risks : Bullwhip effect

Consumer Sales at Retailer

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Manufacturer's Orders with Supplier

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Bullwhip effect customer demand is rarely perfectly stable,

–  businesses must forecast demand in order to properly position inventory and other resources.

–  Forecasts are based on statistics, and they are rarely perfectly accurate. –  Because forecast errors are a given, companies often carry an inventory buffer

called "safety stock".

Moving up the supply chain from end-consumer to raw materials supplier, each supply chain participant has greater observed variation in demand and thus greater need for safety stock.

• In periods of rising demand, down-stream participants will increase their orders.

• In periods of falling demand, orders will fall or stop in order to reduce inventory. The effect is that variations are amplified the farther you get from the end-consumer.

Impact # 6 : New Risks : Bullwhip effect

(See Wikipedia)

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The Beer Game

Impact # 6 : New Risks : Bullwhip effect / The Beer Game

• Age range Recommended for graduate students and members of the business management community. • Setup time 10-20 minutes • Playing time 60-90 minutes plus another 60-90 minutes for debriefing • Rules complexity Medium • Strategy depth High • Random chance None

The Beer Distribution Game (Beer Game) is a simulation game created by a group of professors at MIT Sloan School of Management in early 1960's

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Just-in-time or lean approaches. Because manufacturers have whittled inventory to almost zero, disruptions can shut down a factory. Similarly, retailers have become increasingly reliant on automatic replenishment and vendor-managed inventory: Even brief delays can lead to empty shelves and lost sales.

Global sourcing involves longer lead times, increased uncertainty and heightened security concerns. Although suppliers in developing economies are often the lowest-cost producers, goods can pass through as many as 11 middlemen in transit, greatly increasing the risk of disruption.

Outsourcing : critical operations are managed outside the company and the number of interfaces and potential points of risk increase.

Supply consolidation : increases the potential impact of a disruption.

Accidents : On December 14, 2002, a collision between two ships sent one of the ships and the 3,000 U.S.-bound BMWs, Saabs and Volvos it was carrying to the bottom of the English Channel.

Natural disasters. The 1999 earthquake in Taiwan displaced power lines to the semiconductor fabrication facilities responsible for more than 50 percent of the worldwide supplies of memory chips, circuit boards, flat-panel displays and other computer components. Analysts estimate the quake shaved 5 percent off earnings for hardware manufacturers including HP, Dell, Apple, IBM, Gateway and Compaq.

Political : Opponents of Venezuelan President Hugo Chavez began a general strike in December 2002. Businesses closed. The government froze foreign currency sales. Multinationals including Ford, General Motors, Bridgestone/Firestone, Goodyear and Procter & Gamble were forced to shut down for the duration of the strike. At one point, President Chavez sent the National Guard to seize a plant owned by a Coca- Cola bottler and to redistribute truckloads of drinks.

Economic : In September 2002, longshoremen on the U.S. West Coast were locked out in a labor dispute for 11 days, forcing the shutdown of 29 ports. With more than US$300 billion in goods shipped annually through these ports, the strike caused an estimated US$11 to $22 billion in lost sales, cost of additional air freight, spoiled perishable goods and underutilized capacity. the New United Motor Manufacturing plant (a Toyota-GM joint venture) was forced to close its Fremont truck-making plant because it ran out of parts.

IT infrastructure : In January 2003, in just 10 minutes, a computer worm spread to hundreds of thousands of computers. It created so much volume that at the height of the attack, half of all internet signals could not reach their destination. It caused nearly US$1 billion in damage by overloading the network. Bank of America’s ATM system shut down, telephone systems from Korea to Finland were disrupted and Continental Airlines was forced to delay flights.

Impact # 7 : New Risks : Bigger exposure to external factors

The frequency of natural disasters has increased by a factor of three since the 1960s, but their

cost has increased by a factor of 10.

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Impact # 8 :. The New Border in Retail Logistics / Logistics enters the store

Retail discovers a lot of logistics process inside the stores

Source : Roland Berger

Source : Migros

Up to 50% of time worked in stores is pure logistics or logistics-like process !

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Impact # 8 : The New Border in Retail Logistics / Logistics enters the store

Retail discovers the impact of Out Of Stores

Out of Shelve requires mainly efforts in:

–  Replenishment –  Merchandising issues –  Clear Vision of Stock –  Ordering systems

Which are mainly Logistics Issues !!!

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Doesn't buy anything

9% Buys different size 16%

Buys brand elsewhere

21%

Buys a different brand 37%

Returns later 17%

Source: Roland Berger / ECR Europe

46% lost opportunities

for Manufacturer

30 % lost opportunities for Retailer


The issue is real for Russian Business

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As a consequence, Logistics enters the stores

Therefore Logistics is less an executing function, but a strategic function coordinating :

– Business Development strategies – Planning strategies – Buying strategies – In-Store Processes concepts Production strategies


Mercury Project

OOS – 42% In 7 months (Nov 05 – Jun 06)

+ 20% of Productivity expected

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Impact # 8 : The New Border in Retail Logistics / Logistics goes out from the store

cost breakdown in retailer / supplier relationship model

Retailer

Supplier

Turnover

Price= 100

Retailer

Turnover

Price= 100

Supplier

Interface costs: 17

Retailer

Turnover

Price= 96

Interface costs : 13

Supplier

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Logistics integrates suppliers processes as well / Load Carriers Pooling


One Touch Packaging

Traditional Process

Pooling Load Carriers with suppliers, can generate high gains

• Replenishment time decreased by 75% • Truck filling + 35%

This solution is being tested in Russia (Polymer Logistics)

Pooling can as well apply simply to wooden pallets as well (Chep scheme)

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Logistics integrates suppliers processes as well / Transport Pooling


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The new shape of Logistics

The Russian Logistics is no more only : •  Storing products •  ensuring the delivery of products.

The terrific development of Retail impacts logistics in the following way :

The shape of logistics change –  from points to networks

Logistics goes deeper into store, –  touching every process

Logistics goes far away from stores, –  integrating suppliers strategy (planning,

pooling) –  Sourcing and shipping globally

Logistics becomes flexible and creative –  It has to move with the market

Logistics become a competitiveness and profitability driver

Logistics will become more and more technological,

–  Developing new technologies –  Developing new principles

New Logistics Scheme exposes the company to new risks –  Stretched flows and low stocks maybe a

weakness –  Outsourcing may be risky –  The exposure is global

Learning form Retail & Logistics review

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Logistics will be flexible Changing but unstable

•  Supply chains become more dynamic, -  reflecting the unstable but highly promising

market. -  fulfilling increasing customer requirements, -  Companies supply chain will develop only

over time in Russia

•  Supply chains become “local” -  as different distribution strategies are

chosen for different regions.

The market has till 10 years of maturation at least

Learning form Retail & Logistics review (2/2)

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C. State of Logistics in Russia

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History of Logistics

Military Logistics

IT Revolution

Operational Researches

Modern Industry Revolution

Retail Revolution Globalization

Caesar -> 1939 1980 - 2000 Future 1945 -> 1970 1960 -> 1980

• Supply lines • Warehouses positioning • First Logisticians

See : • Van Creveld

• Speed of supply (transport, cross docking)) • Logistics Preparation • Standardization (pallets, jerrycans)

See : • Overlord

• MRP • Planning

See : • Forrester (MIT) : Industrial Dynamics (1962)

• Managing thousands of SKUs • Just in Time • TQM

See : • M. Ohno works

• Distribution center • Outsourcing • Globalization of flows • Cross Docking

• Global Networks • Supply Chain Management • Reverse Logistics • E-commerce • Role of IT

See : • ECR

1939 -> 1945

WW II

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History of Logistics in Russia

Military Logistics

IT Revolution

Operational Researches

Modern Industry Revolution

Retail Revolution Globalization

Caesar -> 1939 2000 - Future 1939 -> 1945

WW II 60 years “erased”

?

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executives expressed that within the next 10 years, they expect a shift of the center of logistics activity towards Nizhny Novgorod and Ekaterinburg

Source : Dynamic Supply Chains ion Russia Christopher Jahns - Inga-Lena Darkow - Tobias Weigi German Logistics Association - 2006

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Selection Criteria for Logistics Service Providers

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number of logistics services providers per company

2004 2006 2008 1-2 8 0 12 3-4 4 8 8 5-6 0 19 50 7-8 23 58 19 9-10 27 12 8 11-12 27 0 0 >13 12 4 4

in %of respondents

Average quantity if suppliers

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The criteria for selecting a logistics service provider are changing.

There is a shift from a price focus to quality focus. The demand for professional services will grow in the future.

Nevertheless, the next years will be characterized by a pressure on prices.

In the long-term, centers of logistics activity will shift eastwards from Moscow to Nizhniy Novgorod and Yekaterinburg. This, however, depends on the further development and growth in the regions.

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But who can we work with ?

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Warehousing significant growth of the Russian economy caused the warehousing prices in Moscow to increase dramatically.

The price per square meter in 2005 was just below the level in London: up to USS 135 per square meter (JonesLangLassalle 2006).

demand exceeds supply, storage, cross-docking areas for commissioning. Logistics can not be assured, in particular for perishable or sensible goods.

It is expected by specialists that the warehouse market will be growing during the next 10 years

Strong fragmentation of LSP - No Market leader in Russia •  Even not the Russian Post •  Only pioneers : FM Logistics and NLK •  The biggest private logistics network is maybe Eldorado (600 stores

across Russia)

Low level of service •  Lack of experience •  Heavy documentation rules in Russia

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Segmentation of the

market

A new factor unlocking the warehousing and 3pl market :

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Changes in the Russian Logistics Market Structure

Financing Logistics Infrastructure

Developing Logistics Infrastructure

Operating Logistics

Owning the Product

Russian Traditional Vertical Integration

of the 90’s Producers

Distributers

Foreign FMCG outsourcing of the 90’s

Logistics Operator of the 90’s FM Logistic, NLK, Molkom

Unilever, Eldorado, etc

Kuehne + Nagel

Pension Funds

Developers

3PL – Logistics Operator

Clients

New Trend on the market

$$$

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Operating Logistics

• Hypo Real Estate • International

• AIG European Real • Estate Fund

• Raven Russia Limited

• Multinational Logistics Partnership • Kulon Espro • Ros Evro Development • Giffels (Canada) • A.M.G. Group (US) • Eurasia • Ghelamco • Aig Lincoln • Belaya Datcha • Bouygues

• FM Logistic • NLK • DHL • Relogix • Excel • Kuehne + Nagel • Cat Logistics • Schenker

• Hypo Real Estate International financed MLP for the construction of two warehouse complexes at a cost of $300 Mln.

• The AIG European Real Estate Fund has acquired the FM Logistics complex, located in the town of Khimki and offering approximately 65,000 sq m of warehouse space, for over $60 million. First sale and leaseback investment transaction between foreign companies in the warehouse sector of the Moscow market.

• Multinational Logistics Partnership announces the construction of 1 000 000 m2 in CIS • Rosevrodevelopment announces the construction of warehouses in biggest regional centers • Giffels (Canada) Preparing about 550,000 square meters of Class A space. Eurasia is planning to bring to the market anywhere between 1.0-1.2 million square meters of warehousing space within the next 2-3 years. • Capital Partners preparing 500,000-600,000 square meters to market within the next couple of years. • A.M.G. Group (US), Plans the development of a chain of specialty warehouse facilities throughout Russia for 250,000-350,000 square meters to the market within the next 2-3 years.

• Cat Logistics is a new comer on the market

• DHL and Relogix operating in Pushkino

• FM Logsitcs renting out facilities in the regions

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Operating Logistics

Owning the Product

Pension Funds

Developers

3PL

Clients

Reality on the market

Client Z

$$$

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Client B Client C Client D Client A Client E Client F

$$$

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Client B Client C Client D Client A Client E Client F

$$$

4PL

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Learnings from the 3PL Review

A new era has started for 3PL

•  The massive coming of investments onto this market creates the necessary conditions for a 3PL regional expansion

•  Good news : –  The time when logistics supplier dictate their price is going –  The time of Class B, C, …. Z warehouse is going

•  The question is : –  Will foreign 3PL massively come onto the market –  Or stay cautious as are foreign retailers ?

Logistics Lemming effect generating risk

–  Too Severe price decrease –  Too unskilled operators appearing, not adequate for the demand –  Construction services & materials overheat (as for residential construction)

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D. The Regions : A Poor Regional infrastructure

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In eastern Russia at the Pacific Ocean, the capacity of the seaports has not met the rising demand for years.

–  size of the ships has steadily increased over the past decades, but much of the equipment in these ports has remained the same restricting handling capacities.

–  scarcity of Russian ships, –  poor integration of ports into the railway system. –  Russia’s neighboring countries profit from Russian

capacity problems, »  Finland »  Baltic States »  Ukraine,.

most freight needs to be shipped from west to east or vice versa. However, Russian waterways flow mostly from south to north. –  the inland waterways’ share of total transportation fell

from 3.6% in 1991 to 1.6 % in 2005 (in ton/km) (Rosstat, 2005).

Sea Poor infrastructure

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Parallel to the economic growth in Russia, air freight prices are rising and capacity utilization is at its limit due to a poor infrastructure :

–  1302 airports in 1992 vs approximately 421 in 2003.

–  About 50% of all civil aircrafts are more than 15 years old.

–  620 to 820 new aircrafts will be needed in the next few years in Russia, not counting regional airlines (estimates by Russian Ministry of Transport 2003, Economist 2005, Boeing and Airbus)

–  Most ground handling equipment is technically outdated and

–  56% of all air cargo is handled via the three Moscow airports (Domodedovo, Sheremetievo and Vnukovo). Of these, only Domodedovo has been renovated and fully meets western requirements.

Air Poor infrastructure

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Roadway • 940,000 km of roads in 1995 / 871,000 km today • (France = 891,290 km)

• approximately 85% only of the roads are hard surface

• weight restriction for about one third of the total network; consequently its use by trucks is limited

• Russian roads remain dangerous; approximately 35,000 Russians are killed every year in road traffic

• Furthermore, low speed limits in Russia, constant traffic jams in and Moscow, as well as the c’ by the Russian police, hamper transportation..

• prefered transportation up to 1,500 km. This fact contributes to the high importance of road haulage in distribution logistics in Russia.

Poor infrastructure

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Railway The Russian railway accounts for 75.4 % (or US$ 29.6 billion) of the entire revenues of the freight industry,

–  (importance for the transportation of natural resources)

Largest railway network in Europe with 87,000 km (USA = 226,605) in regular use,

–  10 % of railways are defective in some way (the Economist)

–  half of the system needs urgent modernization (the Economist) .

–  Only 50 % of the network used In common carrier service Is electric.

The major player on this market is the national railway operator, JSC Russian Railways (RZhD),

–  By 2010, the company shall be privatized –  The investments made are marginal, with a growth of just

8.5% in 2006. not enough to reach western standards. –  Due to the railway’s significant importance as the backbone

of transportation, the poor condition of the Russian railway network could have a negative impact on economic growth.

Poor infrastructure

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It is urgent to unlock the infrastructure barriers in the Regions

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Undertaken Measures from The Government

the Russian government ignited several programs among :

•  the federal program “Modernization of the Transport System in Russia (2002-2010)”

•  the “Transportation Strategy of the Russian Federation” (2005 – 2020) –  “To create the conditions necessary for a

new development model in a global economy, transportation is the instrument for realizing Russia’s national interests and providing a suitable place for the country in the world economy.”

–  “stimulate the creation of Russian multi-modal transit operators.”

Air •  Logistics centers already are being created at

airports in Moscow, Novosibirsk and Krasnoyarsk.

•  the government is creating the conditions to attract private capital from both Russian and foreign investors.

•  For instance the Krasnoyarsk airport, the Swiss company Swiss Port,

Sea •  The government plans to double the capacity

of the existing 43 seaports by 2010.

Railways •  By 2010, JSC Russian Railways (RZhD), shall be

privatized

Roadways The Russian government initiated several roadways projects :

–  an investment fund in 2006 of US$ 2.5 billion to improve and extend the roadway network by 27,000 km by 2010.

–  public-private-partnerships to improve the network by using.

–  Since Moscow is the major bottleneck for transport in Russia, the Moscow city government agreed upon one of the largest projects in June 2005: an orbital motorway with 8 lanes and a total length of 500 km will be built around the city. This urgently needed project should be finished by 2015.

Unlocking the infrastructure Bottleneck

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Still Necessary Measure from The Government

Financial and capital markets •  shareholder rights program in order to

improve the situation of minority shareholders;

•  reform of the real estate market; •  reform of the insurance system.

Customs •  Customs laws in 2004 have simplified

customs clearance. •  there are still enormous interpretation

problems with the new laws implemented in 2004 by certain customs locations and authorities.

Unlocking the infrastructure Bottleneck

Privatization/Liberalization • opening markets and abolishing monopolies, e.g. in the railway and telecommunication sector; • preparation for WTO membership; • introduction of anti- monopoly laws.

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Learnings from the Infrastructure Review

Russia lost its soviet infrastructure that has been perishing since 1990

The scale of necessary investments is huge

The Government has the means and the will to unlock the infrastructure bottleneck, for the sake of the National Economy

But we can doubt that the 2010 announced term will be achieved

Therefore the regional infrastructure lacks will be the major obstacle to retail and logistics regional expansion

Some good new : –  It will be only better and better –  The country is politically stable and economically stronger and stronger

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E. Conclusion

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Conclusion / The market is getting unlocked

The boom of Retail, and of finances creates the conditions of a world class logistics sector that will integrate Russia in the Globalization

The peculiarity of Russian Logistics are that : •  They did not pass yet the production-logistics period (JIT, industrial parks are unknown

here) •  They already have to implement the state of the art logistics tool to cope with retail and

globalization challenges •  They have to compensate 60 YEARS of “soviet” economical history IN FEW YEARS

•  Russia will pass from a Logistics approach to a Supply Chain approach

•  The private sector creates the conditions of the development of logistics, finances unlock the warehousing and 3PL sectors, creating “hubs” in new networks

•  The efficiency of the links between these hubs will greatly depend on the government investments onto infrastructure

Considering the amount of investments necessary in the private and state sector, the market will develop during the next 10 – 15 years minimum.

We are only at the begining of a new technique, technological, infrastructural and economical change

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Conclusion / Supply Chain

Logistics & Supply Chain Specialists will become closer to customers and suppliers

The new problematics are now : • Global & Systemic • Unstable environment requiring flexibility, agility, quick and complex response • Managing a permanently changing network

Supply Chain will be the backbone of Federal Organizations, preparing organizations for unprecedented challenges

•  The real issue may be PEOPLE !

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Conclusion

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Conclusion / The real issue may be PEOPLE !

–  real need 1,000+ logistics specialists per annum.

–  currently talent pool available 100 logistics specialists per annum

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Thank You for attention!

Feel free to contact [email protected] +7 916 453 30 55 www.conseo-cis.com

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Questions ?

Feel free to contact :

[email protected] +7 916 453 30 55 www.conseo-cis.com

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Credits

Dynamic Supply Chains in Russia Christopher Jahns - Inga-Lena Darkow - Tobias Weigi German Logistics Association - 2006

Logistique Production – Distribution –

Soutien Yves Pimor, 2005

AmCham News Volume 13, Number 73

Executive Agenda

Global Retail Development

Index www.wikipedia.org

68

Note / A good new

A good bier can save your logistics !

logistics, retail and regions

Business

retail logistics

supplier logistics

logistics planning

logistics points

future of logistics

ecr logistics

heartof logistics

state of retail