standard pallets

Suite 105, 51 Rawson St, Epping, AustraliaP.O. Box 1075 Epping NSW 1710

Telephone +61 (0)2 9868 2590 Facsimile +61 (0)2 9868 3517ABN 42 362 863 808

Review of domestic and international pallet standards and ongoing operational and costimplications to Australian Domestic and International Logistics

Final Report

21 March 2002

Creating new horizons for your value chain

Strategic design + Development

Domestic and International pallet standardsOperational and cost implications

In Confidence 21 March 2002


TABLE OF CONTENTS

1. INTRODUCTION ........................................................................................................................................................................................................................................61.1 Some History .....................................................................................................................................................................................................................................7

2. CONCLUSIONS...........................................................................................................................................................................................................................................8

3. RECOMMENDATIONS ...........................................................................................................................................................................................................................10

4. EXECUTIVE SUMMARY........................................................................................................................................................................................................................11

5. SYNOPSIS OF PREVIOUS WORK ........................................................................................................................................................................................................165.1 GISCC - The Australian Pallet Study ..............................................................................................................................................................................................165.2 Efficient Unit Load study by A.T. Kearney.....................................................................................................................................................................................175.3 Efficient Consumer Response (ECR) : a survey of the Australian grocery industry .......................................................................................................................185.4 ECR Pallet Implementation Project: Apaper provided ECR Asia (Singapore)................................................................................................................................195.5 Conclusions......................................................................................................................................................................................................................................19

6. CONCEPTUAL FRAMEWORK .............................................................................................................................................................................................................206.1 Preamble ..........................................................................................................................................................................................................................................206.2 Supply Chain Typology ...................................................................................................................................................................................................................226.3 Changes in market mix ....................................................................................................................................................................................................................246.4 Study components............................................................................................................................................................................................................................256.5 Conclusions......................................................................................................................................................................................................................................26

7. SYNOPSIS OF SURVEY OUTCOMES ..................................................................................................................................................................................................287.1 Respondents .....................................................................................................................................................................................................................................287.2 Summary of Interviews....................................................................................................................................................................................................................297.3 Conclusions......................................................................................................................................................................................................................................29

8. MARKET CONTEXT ...............................................................................................................................................................................................................................308.1 Market Framework ..........................................................................................................................................................................................................................318.2 Manufactured Goods........................................................................................................................................................................................................................318.3 Agricultural Goods ..........................................................................................................................................................................................................................338.4 Retail Markets..................................................................................................................................................................................................................................348.5 Export and import trade ...................................................................................................................................................................................................................358.6 Value of Market Segments...............................................................................................................................................................................................................398.7 Conclusions......................................................................................................................................................................................................................................41

9. AUSTRALIA’S LOGISTICS TASK ........................................................................................................................................................................................................429.1 The task in 2001...............................................................................................................................................................................................................................429.2 Domestic pallet statistics..................................................................................................................................................................................................................47




9.3 Growth forecasts ..............................................................................................................................................................................................................................489.4 Transport indicators .........................................................................................................................................................................................................................489.5 The market mix of the logistics task ................................................................................................................................................................................................499.6 The task in 2020...............................................................................................................................................................................................................................509.7 Implication of the future task...........................................................................................................................................................................................................529.8 Conclusions......................................................................................................................................................................................................................................53

10. PALLET USAGE AND INTERNATIONAL TRADE............................................................................................................................................................................5510.1 Import-oriented containers...............................................................................................................................................................................................................5610.2 Export-oriented containers...............................................................................................................................................................................................................5610.3 Conclusions......................................................................................................................................................................................................................................57

11. OPERATIONAL IMPLICATIONS .........................................................................................................................................................................................................5811.1 Arguments to retain 11652 pallet .....................................................................................................................................................................................................5811.2 Argument to adopt ISO pallet ..........................................................................................................................................................................................................5911.3 Storage issues...................................................................................................................................................................................................................................5911.4 Pallet and order make-up .................................................................................................................................................................................................................6011.5 Vehicle interface ..............................................................................................................................................................................................................................6111.6 Container loading.............................................................................................................................................................................................................................6311.7 Conclusions......................................................................................................................................................................................................................................65

12. FINANCIAL ANALYSIS ..........................................................................................................................................................................................................................6612.1 Framework.......................................................................................................................................................................................................................................6612.2 Cost Elements ..................................................................................................................................................................................................................................6612.3 Discounted cash flow and NPV assessments ...................................................................................................................................................................................6812.4 Conclusions......................................................................................................................................................................................................................................69

13. APPENDICES ............................................................................................................................................................................................................................................70

14. PUBLICATIONS AND RELATED ARTICLES ....................................................................................................................................................................................7614.1 ECR Standard Pallet Implementation Project ..................................................................................................................................................................................7714.2 Efficient Unit Loads by A.T. Kearney.............................................................................................................................................................................................8514.3 Efficient consumer response (ECR): a survey of the Australian grocery industry ..........................................................................................................................88




SUMMARY OF FIGURES

Figure 5-1 Composition of capital cost elements identified within the GISCC report ...........................................................................................................................................17Figure 6-1 Conceptual framework linking the purpose of the pallet to the prevailing market demands and product attributes.............................................................................20Figure 6-2 A Supply Chain Typology outlining influences on Australia's logistics processes...............................................................................................................................22Figure 6-3 Transport and storage output and gross domestic product index ...........................................................................................................................................................24Figure 6-4 Key components of logic within the study............................................................................................................................................................................................25Figure 8-1 Market structure delineating key segments within supply and demand cycles ......................................................................................................................................31Figure 8-2 Subdivision (by value) of Australian manufacturing (including imports and exports) by unitisation class...........................................................................................32Figure 8-3 Subdivision of Retail market within Australia ......................................................................................................................................................................................34Figure 8-4 Value of the major Market Segments for unitised goods within the Australian market .......................................................................................................................39Figure 9-1 Apportionment of container flows as full and empty imports and exports in 2000 ..............................................................................................................................44Figure 9-2 5 Ports volume of container flows in 2000 ...........................................................................................................................................................................................44Figure 9-3 Supply chain configuration incorporating road, rail and sea freight movements on unitised non-bulk products .................................................................................46Figure 9-4 Transport and Storage output and Gross Domestic Product .................................................................................................................................................................48Figure 9-5 Trend analysis for container throughput for the five major ports..........................................................................................................................................................48Figure 9-6 Consumer (Grocery and food) - Market value estimates based on growth forecasts ............................................................................................................................51Figure 9-7 Consumer (Non-Grocery and household) - Market value estimates based on growth forecasts...........................................................................................................51Figure 9-8 Industrial/Other - Market value estimates based on growth forecasts...................................................................................................................................................51Figure 9-9 Totals (All market segments) - Market value estimates based on growth forecasts..............................................................................................................................51Figure 9-10 Forecast trade and consumption comparisons by market sector and total...........................................................................................................................................52Figure 11-1 Various combinations for trailer length and pallet size........................................................................................................................................................................61Figure 11-2 Trailer utilisation, showing under-utilised capacity .............................................................................................................................................................................63Figure 11-3 Demonstrates the difference in loading/unloading techniques.............................................................................................................................................................64




SUMMARY OF TABLES

Table 4-1 Growth rates and value by market segment forecast for 2010 and 2020................................................................................................................................................14Table 4-2 Container movements by pallet standard.................................................................................................................................................................................................14Table 4-3 Matrix for operational decision criteria ..................................................................................................................................................................................................15Table 6-1 Assessment of growth scenarios based on alternative task apportionment and predicted growth forecasts...........................................................................................24Table 7-1 Summary of key survey participants ......................................................................................................................................................................................................28Table 8-1 Australian Market for Manufactured Goods ..........................................................................................................................................................................................31Table 8-2 Summary of Agricultural production and export activity.......................................................................................................................................................................34Table 8-3 Subdivision of the Retail market within Australia .................................................................................................................................................................................34Table 8-4 Summary for import trade, segmented into the unitised classification...................................................................................................................................................37Table 8-5 Summary for export trade, segmented into the unitised classification ....................................................................................................................................................38Table 9-1 Logistics volumes for relevant market segments (unitised/containerised) .............................................................................................................................................42Table 9-2 Inter-capital road freight matrix 1998-99 ('000 tonnes) .........................................................................................................................................................................43Table 9-3 Use of domestic and ISO containers within long distant freight movements .........................................................................................................................................43Table 9-4 Summary of container activity for 1998-9 .............................................................................................................................................................................................44Table 9-5 Summary of Coastal Shipping of Containerised freight.........................................................................................................................................................................45Table 9-6 Estimated volume for pallet issues per annum .......................................................................................................................................................................................47Table 9-7 Summary of key market indicators.........................................................................................................................................................................................................48Table 9-8 Summary of the current and modelled growth by market sector............................................................................................................................................................50Table 9-9 Growth rates and value by market segment forecast for 2010 and 2020................................................................................................................................................53Table 10-1 Geographic distribution of pallet standards..........................................................................................................................................................................................55Table 10-2 Import containers by market segment and pack type ...........................................................................................................................................................................56Table 10-3 Import containers by pack type and pallet standard at origin ...............................................................................................................................................................56Table 10-4 Export containers by market segment and pack type ...........................................................................................................................................................................56Table 10-5 Export containers by pack type and pallet standard at destination .......................................................................................................................................................56Table 10-6 Container movements by pallet standard..............................................................................................................................................................................................57Table 11-1 Matrix for operational decision criteria ................................................................................................................................................................................................65Table 12-1 Summary of cost elements within financial summary..........................................................................................................................................................................67Table 12-2 Project inventory and other costs and benefits .....................................................................................................................................................................................68Table 13-1 Scenarios "A" - "C" indicating growth in indices in the intervening years ..........................................................................................................................................70Table 13-2 Value of market segments and determination of task size by segment ................................................................................................................................................71Table 13-3 Forward projections of production, export, import and consumption estimates based on derived growth indices, by market sector..................................................73Table 13-4 Summary of Import Containers by Origin port for 1995 and 2000 ......................................................................................................................................................74Table 13-5 Summary of Export Containers by Destination port for 1995 and 2000 ..............................................................................................................................................75




1. INTRODUCTION

This study into the operational and cost implications of the AustralianPallet in Domestic and International Logistics has been commissionedby the Integrated Logistics Network (ILN) Australian Marine Group (AMG)

Debate regarding the suitability and implications arising from theAustralian pallet standard has been ongoing since the mid 1990’s.Despite several recent studies and the dual recognition of both theAustralian and ISO pallet criteria the Australian Standards regime(AS4762-2000 “General-purpose flat pallets), the issue remainedunresolved in a number of forums.

Globally, there are four (4) dominant pallet sizes utilised. These are:

1200 x 1000mm pallet, cited as the ISO standard and mostcommon across Asia, Americas, Europe and New Zealand

1200 x 800mm pallet, known as the Euro-pallet 1100 x 1100mm pallet used in Japan and Korea 1165 x 1165mm pallet used exclusively in Australia

Contemporary argument seeking to retain the 11652 pallet have beenbased on the cost to alter the pallet pool (around 15 million pallets),adjust racking and associated equipment, and increased warehousingcosts.

Conversely, previous studies have failed to identify and assess theimplications of an increasingly global logistics network, where

variations in standards and systems generate direct and indirect nonconformance costs.

Taking a 20 year view, and understanding that import and export tradehave substantially higher growth rates than domestic production andconsumption, the “markets” served by Australia’s domestic andinternational fields, will fundamentally change. International trade as a percentage of domestic consumption will

increase Multi-national firms are consolidating their manufacturing platforms

and economising on product range The Asia region is emerging as a substantial market with

countervailing power to set standards

This study incorporates a market perspective and models forecasts thechanging market mix. Over 40 organisations were interviewed todetermine their direction in manufacturing and marketing strategy and torelate these issues to pallet standards.

The pallet remains one of the most pervasive items of logisticsequipment, yet this issue is largely dismissed as trivial by many logisticspractitioners within Australia.

However there is a strong correlation between the views of the multi-national organisations for the need to align Australia’s pallet andcontainer standards with those of its dominant trading partners.

Multi-nationals will make decisions as to where they base theirproduction platforms and/or source materials and products based on theoverall cost of supply.




Australia’s inability to adopt standards which are aligned with itstrading partners will substantially disadvantage its Effectiveness to attract investment Ability to supply export products to current and new markets Ability to import value added products in a cost effective manner

Recently a FMCG multinational manufacturer made a decision torelocate a major production facility to SE Asia and to consolidateproduction. In this instance, Australia will become a net importer ofthe finished product rather than being a net exporter. Those productswill be distributed from SE Asia in cartons that conform to ISOstandards and configured to fit ISO pallets.

Considering the supply chain cost implications of this and otherexamples, Australia will be best served by commencing a process toalign its pallet and carton standards towards the ISO standards used byits trading partners.

To not undertake this process is like the decision by the USA tomaintain the imperial standard of measurement, as the rest of theglobe embraced metric measurements.

One interviewee surveyed the issue akin to dental surgery, saying “itwill hurt to get the tooth out, but it will only get worse if we don’t”.

1.1 Some History

At the end of the Second World War, the US forces abandoned around60,000 pallets which had been used for materials handling purposes.These measured 46 inches by 46 inches and fitted the vehicle traystandards at the time.

Soon after, the Australian Government took over the responsibility forthe pool of pallets under the Commonwealth Handling Equipment Pool,more commonly known as CHEP.

In 1958, CHEP was sold to Brambles and the pool had grown to around90,000 pallets, yet usage was still limited to the waterfront.

By the late 1960’s the pool of pallets had grown to around 600,000pallets based on the original standards. Today the number of pallets isaround 15 million with Brambles, TNT and Loscam offering productsbased on the 1165*1165 mm footprint.

Given the relative isolated nature of Australia’s land transport system,the 11652 pallet has provided an effective means of moving goods.Freight forwarders and transport operators have invested in equipmentbased on the 11652 pallet. Similarly racking and conveyor systems havebeen developed that accommodate the pallet standard.




2. CONCLUSIONS

1. Australia is part of a global economic and logistics system. Ifignored the corollary is that Australia will be relegated as playerwithin the development of supply strategies and processesservicing the burgeoning Asian market.

2. Global manufacturing and brand managers are seeking scales ofeconomy and standardisation of inventory, supported by least costsupply channels, necessitating an alignment of pallet standardsand efficient unit load strategies between Australia and its tradingpartners.

3. Decisions regarding investment and establishment ofmanufacturing platforms within Asia1 will depend on the potentialand capacity for host countries to provide and integrate therequisite and supporting capabilities and standards. Australia mustaddress its lack of readiness in this regard.

4. Efficient Consumer Response (ECR) strategies have emerged as acritical enabler of supply chain efficiency within grocery supplyand demand channels at a global level. Such strategies explicitlyreinforce the need for efficient unit load (EUL) concepts andharmonisation of standards at a global and regional level, ratherthan historic and expedient activities at the domestic level.(i) 65% of Australia’s trading partners (by volume) utilise the

ISO pallet footprint as a key driver for dimensioninglogistics standards.

1 Asia incorporates ASEAN, Middle East, North Asia, South Asia

(ii) Previous assessments to migrate to the ISO standard havebeen influenced by short-term assessments and adisproportionate level of control by a few firms within thesupply chains.

(iii) Recognising the differential growth rates, it is highly feasiblethat the sum of international export and import trademovements will reach 70% of domestic trade (andconsumption) by 2020.

5. Whilst transitional processes may require more than 5 years, a strongeconomic case exists for Australia migrate towards the ISO standardfor pallets, linked to a similar adoption of cartons sizing standards.The issue must be seen in the context of value foregone in themedium to long term, rather than the cost of transition in the nearfuture.

6. Australia operates two container pools each servicing discretesegments of the market (namely international trade and domestictrade) arising as a consequence of the Australian pallet size.(i) Substantial inefficiency exists at the container loading and

unloading interface, requiring the need to universally developand implement unitised loading based on the optimal palletfootprint, however without the need to use a pallet in theprocess. This represents an integral element of the EULconcept applied to the international freight task.

(ii) Freight imbalances cause the movement of empty ISOcontainers in parallel with loaded domestic containers, andthe return of the empty domestic container, yielding a cost of$20 million marginal cost and $40 million opportunity cost.These costs would be expected to triple over time concurrentwith the growth in international and domestic trade.




7. Implementing the ISO standard requires conformance costs of$600 million over ten years however the NPV benefits are over$2.5 billion exist for the period to 2020 (assuming 30% pre taxdiscount rate).(i) The primary benefits are the ECR and EUL strategies and

the secondary benefits are efficient container loadingutilising unitised handling processes.

(ii) The NPV benefits increase to $5.1 billion if the pre-taxdiscount rate is decreased to 20%.

8. Many industry representatives understand the strategic benefit ofstandardising on pallet size, however express the need to addressthe transitional arrangements(i) Past assessment and treatments of the transitional costs

have inhibited commencement and/or progress towards thenew ISO standards

(ii) A review of depreciation and write-off arrangements isnecessary

(iii) Strategies such as double depreciation on investment incompliant equipment should be considered.

9. A clear need exists for government to facilitate the process.Comparisons can be made with the adoption of metric standards,taxation reform, the introduction of new currency, trade reformand assistance, and the like.




3. RECOMMENDATIONS

1. This study recommends the progressive adoption of the ISO palletstandard for Australia with full implementation by 2010.

2. It is recommended that government provides leadership in theimplementation of the ISO standard and recognises that(i) there is a predisposition towards the status quo by industry

based on short-term planning horizons, and(ii) the misalignment of standards should be seen in the

context of a “market failure” that government has alegitimate right to address.

3. It is recommended that the outcomes of the study be presented toAustralian Transport Council (ATC) via the Integrated LogisticsNetwork, with the view of achieving support towards the ISOstandard by ATC.

4. It is recommended that the ILN design and promote animplementation strategy through the Transport and LogisticsWorking Group for industry awareness, consultation and deliveryof the new ISO standard.

5. It is recommended that a review be undertaken of the process andadequacy of implementing Efficient Consumer Response andEfficient Unit load strategies by Australia (i) as part of Australia’s contribution towards the

implementation of efficiency within international supplychains

(ii) as a demonstration of Australia’s long term commitmenttoward the Asia markets

(iii) in support of market development programs such asSupermarkets to Asia

6. It is recommended that depreciation and write-off costs relating tocompliant transitional and/or capital expenditures be structuredwithin a range of taxation incentives designed to foster timelyimplementation of the standard. This recognises that(i) strategic and operational factors identified within the study

yield a positive economic and financial outcome concurrentwith the adoption of the ISO standard, particularly within anECR/EUL context

(ii) supply chain standards have long term implications for trade,and government must remove short-term impediments for industry recognise the transitional cost burdens acknowledge the extent of sunk cost treatments for

distribution infrastructure




4. EXECUTIVE SUMMARY

The following points are drawn from the summary of each chapter ofthis report and can be read in context with the Conclusions in section

From Section 5 (Previous work) The pallet standards issue has been an integral part of the global

debate of the benefits of ECR (Efficient Consumer Response) andEUL (Efficient Unit Loads) strategy.

Global consulting firm AT Kearney undertook a seminal study in1997 and identified that substantial benefits can be realised byharmonising the carton size to the pallet standards, and bydeveloping processes that maintain load (and unit) integrity as faralong the supply chain as possible. Such benefits are between 1.2-1.6% of sales values. A summary of the AT Kearney findings isprovided in the appendix in 14.2 titled “Efficient Unit Loads byA.T. Kearney”.

ECR Asia has undertaken extensive research and development onthis issue, identifying substantial financial benefits andrecommending implementation of the 1200 * 1000 mm pallet.This outcome will have significant implications for Australia’sfuture import and export trade and supporting logistics systems. Asummary of the ECR findings is provided in the appendix insection 14.1 titled “ECR Standard Pallet Implementation Project”.

The Symonds Henderson report (commissioned by the Groceryindustry) recommended the retention of the Australian palletstandard however based 80% of the financial justification on

increased warehouse expansion costs, a finding which is notgenerally accepted from the survey conducted within this study.

An ECR study conducted in 1999 outlined the strategic relevance ofECR within the Australian Grocery industry, and questioned themotives being pursued and the inherent imbalance of power therein.It found that evident deficiencies may cause the strategic benefits tobe lost. A copy of the paper is provided in section 14.3 and is titled“Efficient consumer response (ECR): a survey of the Australiangrocery industry”.

From Section 6 (Framework) The logic and rationale for a prevailing pallet standard is derived

from the conceptual notion of a supply chain and its compositeelements, which exist within the notion of “why do goods move?”

A study into pallets standards requires a number of considerationssuch as

o A long range view of the served marketo A holistic view of the supply chaino The relevance of unitisation and efficiencyo The relationship between products (SKU’s), pallets,

containers and/or trucks

Differential growth rates exist for domestic production, export trade,import trade and domestic consumption, which will lead to a changein the market mix served by Australia’s logistics systems (andstandards)




It is very conceivable that within the next 20 years Australia’sinternational trade and logistics task will reach 70% of itsdomestic consumption2. That is

$import + $export% international trade = ---------------------------- $ domestic consumption

where domestic consumption is a “proxy” for domestic land transport

Logistics processes and standards are increasingly global incontext and application, with marketing and manufacturingstrategies being executed at a global/regional level by largemultinationals with substantial countervailing power

It does not automatically follow that harmonisation betweenAustralia and its customers/suppliers on pallet standards leads tosuch efficiency if considered in isolation. Nor do such alignmentsjustify an increase of pallet usage within containers to facilitateefficient loading and unloading.

The issue is the degree to which retention or dissolution of the currentstandard impact higher order issues such as Carton sizing, consistent with the global ECR (Efficient Consumer

Response) strategy Customer expectation relating to product presentation in overseas

markets

2 The GISCC report by Symonds Henderson identified that there is financialjustification to introduce the ISO pallet where international trade reached 70% ofdomestic grocery consumption

The need for single organisations to tolerate multiple pallet standardswithin a regional (sub-global) manufacturing or supply strategy.

Changes in the market mix serviced by supply chain processes.

From Section 7 (Survey)A number of consistent messages emerged from the interview processconducted within the scope of the study Supply chain philosophy in 2001 has progressed significantly since

the GISCC report of 1997. Supply chain management has emerged as a critical differentiation

for firms in 2001 to 2010 Manufacturing is consolidating to pursue scales of economy Supply chain processes are fundamentally changing with concepts of

“shelf ready packaging” and “reverse crate flows”, emerging. This isbeing facilitated by strategies such as Efficient Consumer Responsesand Efficient Unit Load, and supported by great collaboration thanhas existed in the past.

Stockholders are seeing more sophisticated products (crates, trolleys,slip sheeting) and alternate materials such as plastic

The future of the wooden pallet is limited; the study and reviewprocess was seen to be more about the standardisation process ofhow individual cartons aggregate into “blocks” or “units” thatcomply with a universal footprint standard for internationaldistribution.

There is a clear awareness by multi-nationals that the carton andpallet size is standardizing on the ISO footprint of 1200 x 1000mm




From Section 8 (Markets) Pallets are not used in all supply chains. Generically, three types

of supply chains exist for the purpose of categorisation herein,which are:

o Bulk shipmentso Semi bulk shipments, typically in containers or as

“break bulk” consignmentso Containerised movements of unitised freight (pallets,

cartons, bags, etc.)o It is the third group relevant to the study

Markets considered by this study are manufactured and primaryproducts, retail markets, and export/import international trade

Australia’s international trade is around $210 billion, howevertrade in unitised product represents around 35%, with the majorityof the balance relating to shipment of bulk commodities (coal,grain, minerals, natural gas, etc.)

The market value of Australia’s*/packaged products is around$150 billion, comprising domestic production retained andimported product, for domestic consumption. This can besubdivided into consumer grocery ($54 billion), consumer nongrocery/household ($47 billion) and industrial ($53 billion). Eachsub-element has differential growth rates and trade imbalances,further influencing the composition of the market mix.

The growth rate for international trade is between 8-10%(compound), whereas domestic production and consumption isaround 3-4%.

From Section 9 (Logistics) Whilst substantial reform has focussed on domestic transport

within Australia across road, rail and coastal shipping segments, itwill become more critical that Australia’s transport systems are

integrated with international supply and demand markets and deliverychannels

Products manufactured in Australia for export markets will need tomeet customer expectations for packaging storage andtransportability. Secondly these products must not also conform tocustomer systems, without transferring non-conformance costs alongthe chain. To fail to appreciate this dynamic will cause

o Customers to source products from alternate sourceso Manufacturers to nominate alternate economies for their

production platforms Global manufacturing and brand managers are consolidating with a

focus on Asia. Where Australia’s standards and systems do notcomply with the systems developed by these firms, the total landedand distributed cost of goods will increase for Australia’s consumers

Trade in products which are unitised / containerised will substantialincrease as a percentage of domestic consumption.




Table 4-1 Growth rates and value by market segment forecast for 2010 and 2020

Product, consumption and trade values for containerised products

Current Growth

(a)

Modelled Growth (b)

2001 $B

2010 $B

2020 $B

Comsumer (Food/grocery) Dom. Production 4.2% 61 85 134 Export 11.6% 10.0% 10 24 63 Import 9.2% 9.0% 3 7 16 Dom. Consumption 2.6% 2.6% 54 68 88

Consumer (Household) Dom. Production 4.3% 39 56 86 Export 13.5% 9.0% 4 8 19 Import 14.2% 7.0% 12 22 43 Dom. Consumption 4.6% 4.6% 47 70 110

Industrial/Other Dom. Production 0.9% 29 33 34 Export 5.5% 4.0% 8 11 17 Import 8.4% 5.0% 32 50 81 Dom. Consumption 3.3% 3.3% 53 71 98

Total Dom. Production 3.7% 129 175 255 Export 8.2% 22 44 99 Import 5.9% 47 79 141 Dom. Consumption 3.5% 154 209 297

Ratio international trade to consumptionComsumer (Food/grocery) 25% 46% 90%Consumer (Household) 33% 43% 57%Industrial/Other 75% 86% 99%Total 45% 58% 81%

(a) Based on ABS Economic indicators against market values(b) Composite forecasts derived from ABS Economic indictaors and adjusted to reflect volume growth in contaier 1995-2000

Container movements and volumes relevant to the pallet standardsissue are

o Imports – 375,000 TEU’so Exports – 400,000 TEU’so Coastal shipping

Tasmania - 190,000 TEU’s Other - 35,000 TEU’s

The movement of empty ISO containers to WA and emptydomestic containers from WA yields a marginal cost around $20

million per annum and also represents an opportunity cost of $40million recognising that parallel freight movements by rail and roadare undertaken. It is considered that harmonisation between ISOcontainers and the product footprint (pallet) would address this cost,whether considered in a marginal or opportunity cost treatment.

Australia’s pallet pool system is valued at $200 million per annum,and generates around 40 million pallet issues. There are around 15million pallets in circulation

From Section 10 (Pallet usage)Trade to/from containers that use ISO pallets account for 60-70% byvolume, with imports growing at 5% and exports at 10%

The following table summarises the key results.Table 4-2 Container movements by pallet standard

Pallet size Imports Exports

1100 x 1100 ‘000 TEU’s 35 62% total 10 16% growth 9 3



Non Standard ‘000 TEU’s 15 23% total 4 5% growth 6 10

TOTAL ‘000 TEU’s 370 400




From Section 11 (Operations Implications)

The decision and supporting logic can be summarised in the followingmatrix.Table 4-3 Matrix for operational decision criteria

1165 * 1165 mm pallet 1200 * 1000 pallet

Current cartonsizes

Current situationidentified as yielding10% inefficiency inutilisation.EUL analysis identifies1.2-1.6% cost to sales ofsuch inefficiencies

Given certain % of casesizes are based on the ISOstandard, this option mayabsorb under-utilisedcapacity (and “slack”)

Cartons based on580 * 387 module

Recommended inGISCC report to be ofsignificant benefit, ifharmonised howeverignores global trendtowards ISO cartonstandards

Not considered as a viableoption


Increasing trend in thisdirection will proliferatecurrent inefficienciesfurther

Potential to off set nearterm adjustment costs forinfrastructure60-70% global activitybased on ISO standard forcartons and pallets

From Section 12 (Financial)The financial analysis allows for A capital expenditure of $600 million for adjustments to the pallet

pool, racking and ancillary equipment over the 10 years The incremental increase in operating costs by $100 million is

assumed over the same period The benefits of ECR/EUL are applied to 75% of the market segment

for consumer grocery and non grocery products and 50% forindustrial products

Unitised loading of containers is a substantial benefit

The analysis yields a positive NPV of $2.5 billion, assuming an inflationrate of 3% and a discount rate of 30% (pre-tax).

This NPV increases to over $5.1 billion of the discount rate is decreasedto 20%.

Prime-facie, there appears to be a substantial cost impact if the currentstandard is maintained, leading to non conformance costs arising fromthe “disconnect” between standards.




5. SYNOPSIS OF PREVIOUS WORK

A review of the previous work in this area has identified the followingreferences relevant to this study. These are referred to within thisreport.

The Grocery Industry Supply Chain Committee (The AustralianPallet Study) undertaken by Symonds Henderson for the GroceryManufacturers Association and the Australian SupermarketsInstitute (1997)

Efficient Unit Loads study by A.T. Kearney (1997) Efficient Consumer Response: a survey of the Australian grocery

industry – Harris, Swatman and Kurnia (1999) Recommended Pallet Standard for Asia, a brochure issued by

ECR Asia recommending the adoption of the 1200 mm * 1000 mm

ISO pallet

5.1 GISCC - The Australian Pallet Study

This report provides a comprehensive overview of the criticalelements impacted by a change in the pallet standard within Australiafrom the perspective of the grocery industry, and presents a number ofcase studies for manufacturers and distributors. The followingconclusions are summarised from the study. “The cost of pallet size conversion would be borne by the

domestic grocery manufacturers, retailers and service providerswith virtually the only saving benefits being derived frominternational trade”

“The estimated capital cost of a pallet change to the groceryindustry is $A1195 million, with perpetual additional operating

costs of $A62.8 million per annum”. This is based on avoiding anyoverhang on the pallet.

If an overhang is tolerated, the capital cost is reduced to $A980million.

Saving would be limited to $25.3 million for container loading andunloading efficiencies

NPV was calculated to be negative $376 million “Only when palletised international trade grows to over 70 percent of

the total Australian domestic and foreign grocery and produce salesor there is a significant change to pallet technology, unavailable onthe 1165 square, would the NPV become positive”

The research identified the potential for significant savings applicableunder Efficient Unit Loads (EUL) initiative proposed by ECR Europeand A.T. Kearney

GISCC recommended not changing the Australian pallet standard,but did recommend the further development for “optimising the palletfit” and investigating the EUL methods.

Whilst the NPV was negative, it was acknowledged that the EULbenefits would offset the capital and recurring costs, however impliedthat these benefits should be internalised for the grocery industry

Recognition of the ISO pallet subject to the development of futurepallet technology or a potential change in the task mix within a higherproportion of international trade evident.

Asserted that “in no circumstances should the industry use both sizesin one open system”

The composition of the requisite capital costs is shown on thefollowing graph.




Figure 5-1 Composition of capital cost elements identified within the GISCC report

-

200

400

600

800

1,000

1,200

1,400

Estimatedcapital cost

Modificationto existing

pool

Additionalpallet

requirement

Modificationto pallet

machinery

Modificationto existingrack / MHE

Storagefacility foradditional

pallets

Modificationto transport

fleet

The Symonds Henderson report ( commissioned by the Groceryindustry) recommended the retention of the Australian palletstandard, however based as much as 80% of the financialjustification on increased warehouse expansion costs, a findingwhich is not generally accepted from the survey conducted withinthis study.

5.1.1 Key issues addressed

The report is comprehensive in its analysis of equipment interface andoperating costs, dealing with pallet and ancillary equipmentmodification costs.

The major thrust of the report is based on the 12.5% reduction in thefootprint area for the pallet from 1165 mm square to 1200 mm * 1000 mm.As a result, it is inferred that handling costs increase by 12.5%, trailerefficiency is reduced, labour costs increase, warehouse-rackingutilisation reduces and there is a need to increase warehousing area andprovision of racking locations by the same proportion.

Over 80% of the overall capital cost is captured by two key elementsrelating to racking adjustments and increased warehousing requirements. 5 million racking locations to be adjusted at $45 per location,

assuming no overhang is tolerated, leading to a one off cost of $225million

Whilst a four percent reduction in storage floor area is available withcompression of racking, it is essential that an additional 1.3 millionrack locations required at $600 each, totalling $777.6 million

The analysis assumes that the migration to the new pallet standard willnot absorb the under-utilisation inherent within the chain, evident due tothe proliferation of carton sizes, particularly ISO carton standards.

5.2 Efficient Unit Load study by A.T. Kearney

In 1997, global consulting firm AT Kearney undertook a seminal studyregarding supply chain efficiency and the relevance of harmonisation ofstandards. The context of the study is generally limited to grocerymanufacturers and distributors.

The study assessed the implication of co-ordination within supply chainsin a concept labelled “Efficient Consumer Response”. Within the study,




analysis was given to the importance of Efficient Unit Loads (EUL),and this study importantly draws on the findings of AT Kearney.

For a more detailed explanation on EUL in the Appendix underSection 14.2

A summary of the key findings is available at http://www.ecrnet.organd key findings include Efficient unit loads impact 12-15% of retail sales price. Savings

opportunities represent 1.2% of retail sales price in the Europeancontext.

Unit load harmonisation is key to supply chain integration andbreak through results

Projected savings are not evenly spread among manufacturers andretailers, with the latter group expected to gain three quarters ofthe benefit

The GISCC report which is summarised in the previous sectionidentified the importance and value of the EUL principle andidentified that a saving of 1.64% of retail sales is possible.

Based on the estimate of $54 Billion for Consumer–grocery/foodproducts, the implications of ECR/EUL equate to $850 millionreduction in chain costs. If non grocery and household productsare added to this group, totalling $101 Billion, benefits arisingfrom EUL would yield $1.6 Billion in chain savings.

5.3 Efficient Consumer Response (ECR) : asurvey of the Australian grocery industry

This study and report was co-authored by John Harris, Paula M.C.Swatman and Sherah Kurnia and was published in the journal “SupplyChain Management: An International Journal” (1999), Volume 4,Number 1, pp35-42.

The paper presents the results of an Australian study which was designedto assess the applicability of ECR within the Australian grocery industry.A copy of the full text is provided in the Appendix 14.3 on page 83.

Whilst ECR represents a broader, contextual issue surrounding pallet andcarton standards, the report made a number of substantive statementsworth incorporating herein. “The goal of ECR is to take out of the supply chain costs which do not add

consumer value (Robins, 1994). ECR is about producing efficiencies in the grocerysupply chain within the four core business process areas of efficient storeassortment, efficient replenishment, efficient promotions and efficient productintroductions (Kurt Salmon Associates, 1993).”

“There is considerable interest in ECR in Australia, with 61 per cent ofrespondents being aware of ECR and 40 per cent of respondents actively pursuingan ECR strategy). Despite this interest in ECR, we believe that there is no realcommitment to its implementation.”

“One of the main reasons given for adopting ECR is pressure from tradingpartners. These results, which differ significantly from the (comparatively limited)evidence available from the USA, suggest that the Australian motive for engagingin ECR may well be quite different. Indeed, the likelihood is that Australian groceryindustry members appear to be "encouraged" to engage in ECR by large andpowerful customers (supermarkets) - a situation which is reminiscent of theAustralian experience with EDI. There is thus a real danger that, as with EDI,organisations may become involved only to the extent required by their larger andmore powerful trading partners, so that the full benefits of a strategic approachmay be lost.”

http://www.ecrnet.org/




5.4 ECR Pallet Implementation Project: Apaperprovided ECR Asia (Singapore)

A full copy of the report is provided in Appendix 14.1 on page 72

The results of the study identified substantial benefits and savings byadopting the ISO standard through South East Asia.

The outcome of the study provides a stark contrast to the results of theGISCC report referred in section 5.1 on page 16. However it must berecognised that whilst the principles are consistent, the relativeimmaturity of the Asian situation would yield significant benefit,which may not follow with a more mature environment such asAustralia, having already established substantial infrastructure costs.

5.5 Conclusions

The pallets standards issue has been an integral part of the globaldebate of the benefits of ECR (Efficient Consumer Response) andEUL (Efficient Unit Loads) strategy.

Global consulting firm AT Kearney undertook a seminal study in1997 and identified that substantial benefits can be realised byharmonising the carton size to the pallet standards, and bydeveloping processes that maintain load (and unit) integrity as faralong the supply chain as possible. Such benefits are between 1.2-1.6% of sales values.

The Symonds Henderson report ( commissioned by the Groceryindustry) recommended the retention of the Australian palletstandard, however based as much as 80% of the financial

justification on increased warehouse expansion costs, a finding whichis not generally accepted from the survey conducted within this study.

An ECR study conducted in 1999 outlined the strategic relevance ofECR within the Australian Grocery industry, and questioned themotives being pursued and the inherent balance of power therein. Itfound that deficiencies may cause the strategic benefits to be lost.

ECR Asia has undertaken extensive research and development onthis issue, recommending implementation of the 1200 * 1000 mmpallet, which will have significant implications for Australia’s futureimport and export trade and supporting logistics systems.




6. CONCEPTUAL FRAMEWORK

6.1 Preamble

The conceptual notion of a supply chain and its composite elementsexists within the notion, “why do goods move?”

Whilst the obvious subject of the study is the pallet and its prevailingstandard, the underlying argument extends to the purpose and fit ofthe pallet within the supply chain. It therefore begs the question as tothe need and existence of the pallet in the first instance, and if itspurpose and use has been found to be “wanting”, then what itemand/or process will replace the pallet.

Most supply chain practitioners will share anecdotes and experiencesof pallets as an item of logistics equipment. Some of those samepractitioners are searching for alternatives such as slip-sheets,intermediate bulk containers/crates, and alternate materials such aplastics and compressed paper.

A study into pallet standards requires a number of considerations suchas: A long range view of the served market A holistic view of the supply chain The relevance of unitisation and efficiency The relationship between product (SKU), pallet and container or

truck

A conceptual model of the inter-relationship between markets andpallets is provided in the following diagram.

Figure 6-1 Conceptual framework linking the purpose of the pallet to the prevailingmarket demands and product attributes




ProductionProduction MarketMarketFlow of goods (a)Flow of goods (a)

(a) Goods may be raw materials, intermediate and finished products(b) Where demand characteristics change, then supply processes will equally need to change

Demand characteristics (b)

• Location of markets–existing–future, emerging

• Frequency and expectation• Growth

Product attributes• Bulk, pack type• Presentation• Value-added

Supply processes• Sources

– regionalisation ofmanufacture

– centralisation of supplyand inventory

• Channels• Methods

– integration– connectivity– unitisation

The relationship between

products, pallets and

containers/vehicles

The relationship between

products, pallets and

containers/vehicles

Within the conceptual framework outlined in Figure 6-1 above, there is adirect relationship between the pallet (role and standard) and the servedmarket.

The issue has been treated tactically to date as pallet costs are the domainof the “firm”, and in the context of a firm’s individual potential toinfluence the pallet standard, the outcome for practitioners has been tomove onto “the next big issue”.

Yet collectively (at a national level) the pallet issue is an importantelement that influences the overall efficiency of the “system” servicingour market requirements.




It does not automatically follow that harmonisation between Australiaand its customers/suppliers on pallet standards leads to such efficiencyif considered in isolation. Nor does such alignments justify anincrease of pallet usage within containers to facilitate efficient loadingand unloading.



markets The need for single organisations to tolerate multiple pallet

standards within a regional (sub-global) manufacturing or supplystrategy.


6.2 Supply Chain Typology

There are three direct and one indirect supply chains relevant toAustralia. These can be represented within the following diagram.

Figure 6-2 A Supply Chain Typology outlining influences on Australia's logisticsprocesses

MARKET (Destination)

PRO

DU

CT

ION

(Ori

gin)

Local Overseas

Loc

alO

vers

eas

Domestic logisticsoperating essentially as a closed loop and not linked to global markets or chains

Export logisticsservicing the demands of overseas customers, with substantial growth expected in next 10 years

Import logisticsinfluenced by the countervailing power of increasingly large suppliers and Australia’s “appetite” for value added products

Global logistics with increasing dominance to set trends in logistics techniques, which influence supply chain and market decisions “follow the leader”

IndirectDirect


PRO

DU

CT

ION

(Ori

gin)

Local Overseas

Loc

alO

vers

eas






PRO

DU

CT

ION

(Ori

gin)

Local Overseas

Loc

alO

vers

eas





IndirectDirect




6.2.1 Domestic LogisticsAustralia’s domestic logistics have been benchmarked to be efficient,particularly road transport processes. It has seen the emergence ofdominant transport operators seeking opportunities to verticallyintegrate from “wharf to door”. Industry consolidation of the playersis the current trend.

Most transport initiatives have been founded on the east-westcorridor, where cubic utilisation within the “structure gauge” for roadand rail has been a strong focus.

Australia’s domestic market is small and lacks density and scaleeconomy.

6.2.2 Export LogisticsThe development of export markets has been seen as critical bygovernment and industry alike, with initiative such as Supermarkets toAsia and the Habitat Alliance identifying the need to substantiallyincrease the export of value added products or unique and qualityprimary products.3

Food quality attributes have continued to provide Australia withongoing global opportunities.

3 Exports of Food products to Asia have increased from $4.8B in 1991-92 to around$13B in 2000-01 – source Supermarkets to Asia database

6.2.3 Import LogisticsFor non-bulk freight, Australia remains a net importer of goods, sourcingover $67B trade annually from USA, Asia and Europe. With the plannedconsolidation of manufacturing within the Asia region, the trend to movemanufacturing off-shore from Australia will see the strong import freightcontinue, tempered periodically by currency exchange rates and policyintervention to address trade imbalances.

6.2.4 Global LogisticsRecognising that “no country is an island”, Australia’s domestic, importand export logistics processes will increasingly align with global trendsinfluencing inventory policy, technology applications, customer serviceexpectations, product performance and presentation and transportmethodologies and economics.

Supply and demand choices will occur at a global level, which willinfluence the degree of integration of Australia’s supply chains withinregional and global chains.

The degree to which global inventory processes continue to align withinthe ISO standard, will provide a countervailing influence of the samechoices that Australia’s supply chain practitioner’s may make.

Alternately, Australia may not have a choice, where economics ofproduction and inventory pre-determine such outcomes.




6.3 Changes in market mix

There is a temporal dimension to the issue, which will impact supplychains, techniques and equipment.

The land transport task linking the domestic production andconsumption clusters will progressively migrate from being domesticto becoming more focused on international supply chains. Whilst thisaspect is dealt with empirically in Section 9 the following paragraphsillustrate the point.

The Transport and Storage Index has approximated GDP since theearly 1990’s. Given that conceptual notion that transport provides alink between markets (consumption) and production, this is acceptedintuitively.

Figure 6-3 Transport and storage output and gross domestic product index

Table 6-1 provides a theoretical example of three scenarios experiencingdifferent growth rates for international and domestic trade. Furtherexplanation is provided overpage.

Table 6-1 Assessment of growth scenarios based on alternative task apportionment andpredicted growth forecasts

Error! Not a valid link.

Refer also to the Appendix Table 13-1 Scenarios "A" - "C" indicatinggrowth in indices in the intervening years on page 65

From Table 6-1 the task mix in Scenario “A” is consistent with therelativity between domestic and international flows identified in theGISCC report of 1998.4

Scenarios “B” and “C” provide for alternate mixes in the task split as80:20 and 70:30 respectively.

For all scenarios, the total growth is limited to 3.5% (compound) overthe twenty years to 2020. The growth in the international task is assumedto be 8% consistent with various forecasts and references.

Under these criteria, the growth in the domestic task will vary to meet theoverall consumption index.

Scenario “A” yields a growth in the domestic task of 2.7% and yields a% task mix of 78%, against an international task of 22%.

4 The Grocery Industry Supply Chain Committee report titled “The Australian PalletStudy” for the Grocery Manufacturers’ Association ad the Australian SupermarketsInstitute undertaken by Symonds Henderson




For scenario “B”, the domestic growth required reduces to 1.5%, withan outcome of 55% in the overall mix. For scenario “C”, a negativegrowth in the task is necessary with an initial task split of 70:30,yielding an a domestic outcome of 33% in the total task.

6.4 Study components

Whilst pallet standards are the subject of the study, using pallets insupply chains is only relevant to the extent that Pallets provide a fundamental and efficient means for transporting

cartons Technology relating to crates, returnable boxes, and “shelf ready”

packaging is being assessed as part of EUL and ECR strategies,particularly within the grocery industry. This will change thenature of the pallet, however issues relating to the “foot printstandard remain critical and in need of resolution

Containers move products and cartons as international trade. Itdoes not automatically follow that pallet use within containers isany more or less efficient. The pallet is a component of transportand storage that interfaces with the container for the land transportcomponent.

Emerging opportunities for using pallets within ISO containers forcoastal shipping is a secondary issue and needs to be treated as amarginal benefit.

Moreover, exogenous factors such as markets and growth are relevantto the extent that Key market segments need to be assessed separately, as each has

different growth rates and vary with respect to the mix of domesticand international trade

Multi-national firms are implementing regional and global strategiesseeking production scales of economy and proximity to substantialmarkets

Growth rates in market segments are expected to yield outcomesconsistent with the threshold of 70% identified within the GISCCstudy referred in section 5.1 on page 5.

The following diagram summarises the key components of logic withinthe study.

Figure 6-4 Key components of logic within the study




Towa

rds

ISO

pac

kaging

sta

ndar

ds

Compliancewith ISOstandards

Domesticstandards

ISOpackagingstandardsand domesticpalletstandards

Towa

rds

ISO

pallet

stan

dard

s

Marketing and manufacturing strategy

Domestic focus Hybrid/transitionalphase

Globalisation andincreasing connectivity

Closed systemsand domestic

standards; maybe efficient ina steady state

Currentsituation withinAustralia, dueto increasingimports bymulti-nationalfirms

Alignment and efficiencyof pallet standards withpackaging and containerstandards

The “statusquo” will lead tosubstantialinefficiencycurrentlyestimated tobe 10-15% sub-optimalutilisation

Note 1

Note 2

Prev

ailin

g st

anda

rds

Mutually exclusivedecision points

Export and import trade as apercentage of domestic consumption

0% 25% 50% 75%

Note 1 – denotes a strategy that seeks to maintain the status quoNote 2 – proposes that decisions regarding cartons ad pallets aremutually inclusive

6.5 Conclusions




The logic and rationale for a prevailing pallet standard is derivedfrom the conceptual notion of a supply chain and its compositeelements, which exist within the notion of “why do goods move?”

A study into pallets standards requires a number of considerationssuch as

o A long range view of the served marketo A holistic view of the supply chaino The relevance of unitisation and efficiencyo The relationship between products (SKU’s), pallets,

containers and/or trucks

It does not automatically follow that harmonisation between Australiaand its customers/suppliers on pallet standards leads to such efficiencyif considered in isolation. Nor do such alignments justify an increaseof pallet usage within containers to facilitate efficient loading andunloading.



markets The need for single organisations to tolerate multiple pallet

standards within a regional (sub-global) manufacturing or supplystrategy.


Differential growth rates exist for domestic production, exporttrade, import trade and domestic consumption, which will lead to a

change in the market mix served by Australia’s logistics systems (andstandards)

It is very conceivable that within the next 20 years Australia’sinternational trade and logistics task will reach 70% of its domesticconsumption5. That is

$import + $export% international trade = ---------------------------- $ domestic consumption

where domestic consumption is a “proxy” for domestic land transport

Logistics processes and standards are increasingly global in context andapplication, with marketing and manufacturing strategies being executedat a global/regional level by large multinationals with substantialcountervailing power

5 The GISCC report by Symonds Henderson identified that there is financialjustification to introduce the ISO pallet where international trade reached 70% ofdomestic grocery consumption




7. SYNOPSIS OF SURVEY OUTCOMES

More than 50 individuals representing 40 organisations wereinterviewed to provide views and input into the study. These include:Manufacturers/Importers/ExportersEquipment providersRetailersPolicy Advisers

7.1 Respondents

The table adjacent provides a summary of the key participantsassessed in terms of financial size, geographic focus, logistics scopeand perceived positive or neutral support or the issue of palletstandardisation.

A comprehensive contact list is provided under separate cover.

Table 7-1 Summary of key survey participants

Org

anis

atio

n or

in

divi

dual

Type

Rev

enue

Glo

bal

Rev

enue

Dom

estic

Geo

grap

hic

focu

s

Impo

rt lo

gist

ics

Expo

rt lo

gist

ics

Dom

estic

logi

stic

s

Slip

she

etin

g

Bachell Equipment n/a AsiaBaxter Manufacturer $8000m $285m GlobalBBC Retailer Not stated AsiaChep Equipment ~$140m GlobalColes Retailer Not stated DomesticCRT Services $50m DomesticCUB/Fosters Manufacturer $4200m - GlobalDFAT Policy - n/a AsiaDexion Equipment - - DomesticFCL Services - $100m DomesticHeinz Manufacturer $500m AsiaHolden Manufacturer Not stated GlobalIKEA Retailer $7000m $110m GlobalJJP Manufacturer $230m GlobalK&S Services $130m DomesticKelloggs Manufacturer Not stated DomesticLoscam Equipment Not stated AsiaMurray Goulburn Manufacturer $1500m AsiaNestle Manufacturer $2200m GlobalP&G Manufacturer >$1000m GlobalSCT Services - $100m DomesticSimplot Manufacturer $3500m $500m GlobalSonneveld Policy - n/a GlobalTDG Services - Not stated DomesticTNT Materials Equipment - Not stated DomesticToll Logistics Services - Not stated AsiaToll SPD Services - $265m DomesticUBA Manufacturer - $1000m AsiaUncle Toby's Manufacturer $350m AsiaUnilever Manufacturer $1300m GlobalWoolworths Retailer - $15000m Domestic




7.2 Summary of Interviews

A summary of interviews is provided in the part two of the reportunder separate cover. The interview process provided an exhaustiverange of perspectives with the “multinationals” providing the moststrategic outlook.

Service providers expressed concern regarding the impact and cost ofchange, whereas equipment providers expressed a degree of“neutrality”, indicating a preparedness to follow customer directions.

Early within the survey process, discussion tended to pursueoperational and technical perspectives, however later discussionsidentified the links between manufacturing, marketing, marketingpolicy, carton standards and pallets. This line of research led to thedevelopment of the Conceptual framework shown in Figure 6-1 onPage 20.

7.3 Conclusions

A number of consistent messages emerged from the interview processconducted within the scope of the study

Supply chain philosophy in 2001 has progressed significantlysince the GISCC report of 1997.

Supply chain management has emerged as a criticaldifferentiation for firms in 2001 to 2010

Manufacturing is consolidating to pursue scales of economy Supply chain processes are fundamentally changing with

concepts of “shelf ready packaging” and “reverse crate flows”,emerging. This is being facilitated by strategies such as

Efficient Consumer Responses and Efficient Unit Load, andsupported by great collaboration than has existed in the past.

Stockholders are seeing more sophisticated products (crates,trolleys, slip sheeting) and alternate materials such as plastic

The future of the wooden pallet is limited; the study and reviewprocess was seen to be more about the standardisation process ofhow individual cartons aggregate into “blocks” or “units” thatcomply with a universal footprint standard for internationaldistribution.

There is a clear awareness by multi-nationals that the carton andpallet size is standardizing on the ISO footprint of 1200 x1000mm




8. MARKET CONTEXT

The application of a particular item of handling or transportequipment such as pallets and containers must be seen within thecontext of its market, and an assessment of the “served market” isconsidered worthwhile.

Not all supply chains are serviced by pallets and/or containers, ratherare limited to supply chains servicing specific manufactured and/orvalue added products.

Conclusive data regarding the physical movements of these goodswithin supply chains is not available, however judgements can bemade from an assessment of the value of the goods within specificmarkets.

The following analysis based on the degree of unitisation6 employedwill determine the relative market sizes for three (arbitrary)classifications, which are

Goods that are never unitised, palletised, or containerised, and aregenerally bulk commodities and refined products, or automotivevehicles.

Goods that are not typically palletised, and but may becontainerised, and may generally be handled and break-bulk

6 For the purpose of efficient definition, “unitisation” will refer to the genericpractice of value adding through packaging and/or used of pallets and containers forthe transport and storage of the goods

cargoes. Such products include steel and lumber, however may beunitised dependent on destination, consignment size and so on.

Goods that are almost always unitised and containerised, such andgrocery and other consumer items. Products are always transporteddomestically on pallets, however import/export movements mayemploy pallets, slip-sheeting (or similar) or are hand-stacked withinthe container.

The classification used herein will also show this in graphical form asfollows.

Classification Unitised Palletised Containerised(international)

A (never) (never) (never)

B (never) ? (not usually) (typically)

C (always) (domestic)? (subject toproduct type)

(always)

The following sections develop a composite model for marketsegmentation, based on data from a number of sources. Manufactured goods Agricultural goods Retail markets Export and import trade

Recognising the limitations and scarcity on volume data, product andtrade values has been used as a proxy.




8.1 Market Framework

The following table provides a market segmentation model in orderthat the “pallet issue” is placed within an overall context forAustralia’s trade and supply chain activity.Figure 8-1 Market structure delineating key segments within supply and demandcycles

8.2 Manufactured GoodsThe total value of Australian market for manufactured goods totalsaround $260 billion7. An assessment of these manufactured productsprovides the following observations. Food, beverage and tobacco is the largest category of manufactured

goods, representing almost 20% by value Around 25% of the manufacturer’s sales is exported, with one quarter

of exports being food, beverage, tobacco, textile, clothing, footwearand leather goods

Almost 40% of the market value is served via imported goods, ofwhich 75% are not unitised on pallets and/or containers

Table 8-1 Australian Market for Manufactured GoodsSales incl.

ExportsExports Imports Total Aust.

MarketLikely

unitisation class

$B $B $B $BFood, beverage and tobacco mfg. 49.9 13.2 4.5 41.2 CTextile, clothing, footwear and leather mfg. 8.4 2.6 6.9 12.7 CWood and paper product mfg. 16.3 1.4 3.5 18.4 BPrinitng, publishing and recorded media 12.2 0.5 2.0 13.7 BPetroleum, coal, chemical and associated product mfg 35.7 6.9 16.8 45.6 A

Non-metallic mineral products mfg. 10.4 0.3 1.4 11.5 AMetal products mfg. 32.2 18.3 7.9 21.8 BMachinery and equipment 42.0 13.9 56.1 84.2 BOther mfg. 6.4 0.8 3.1 8.7 B

Total mfg. 213.5 57.9 102.2 257.8

(a) Imports by industry of origin(b) Manufacturers' sales less exports plus imports(C) Plastics polymers are distributed either as bulk, semi bulk or packaged(d) Includes $2b for production of soaps and powders, and cosmetics

Source ABS – Manufacturing – 8225.0 - 2000

7 ABS publication: Manufacturing (Cat. no. 8225.0) 2000

Agricultural -non processed

Agricultural -processed(a)

Manufacturedgoods

Intermediatemanufacturedgoods

Imports

Exports - bulk(fuel, coal,etc)

Exports -containers

Domestic bulkmarkets

Industrialmarkets

Consumer -grocery

Consumer -non grocery

(a) ABS data for Manufactured goods includes processed agricultural inputs denotes segment dimensioned and relevant to study




Figure 8-2 Subdivision (by value) of Australian manufacturing (including importsand exports) by unitisation class




��

��

��

��

��

��

��

��

Subdivision by value of Australian Manufacturing totalling $260 B

Never unitised22%

Not usually unitised

49%Almost always unitised and palletised29%

8.3 Agricultural Goods




Australia continues to develop and grow its agricultural export sector,particularly given the perceived value and quality of Australianproduce within the Asia markets.

Table 8-2 Summary of Agricultural production and export activity

Agricultural products 1998-99

'000 tonnes Value $m '000 Value $mLivestock products (a)Beef 1,973 4,476 (b)Chicken 564 1,018 (b)Other 1,022 1,753 (b)Total 3,559 7,247 (b)

Wool 688 2,140 377 1430Rice 1,362 290 655 408Milk 10,102 2,900 240 67Grapes 1,265 1,191 113 104Fruit 1,650 1,426 170 300Vegetable 3,077 1,497 45 22

25,262 23,938 1,600 2,331 (a) Excludes sales of live animals(b) Processed as manufactured goods

ExportProduction

8.4 Retail Markets

The retail trade market within Australia is valued at around $130 billionper annum8 (excluding Hospitality and Services), with grocery retailvalued at $45 billion.

Except for distribution of goods relating to hardware and appliancetransport and distribution, most retail good are unitised on pallets andtransported on vehicles or within containers.

Table 8-3 Subdivision of the Retail market within Australia

Retail category Sales$B Average Gross Margin (a)

Costs (b) Product value (C)

$B $B $BSupermarkets 45.0 20.0 9.0 36.0 Other food retailing 17.0 20.0 3.4 13.6 Department stores 13.4 - 13.4 Clothing and soft goods 10.3 40.0 4.1 6.2 Furniture and coverings 4.9 - 4.9 Hardware 5.3 30.0 1.6 3.7 Appliances 8.0 15.0 1.2 6.8 Recreational goods 7.3 35.0 2.6 4.7 Pharmaceutical and other 17.3 30.0 5.2 12.1

Total retail market 128.5 27.1 101.4

(a) Average gross margins ABS data 8624.0 1998-00(b) Assumes 20% operational and other sales costs(C) Value of goods net of operating costsSource – Retail trade – 8501.0 – July 2001

Figure 8-3 Subdivision of Retail market within Australia

8 ABS publication: Retail Trade (Cat. No. 8501.0) July 2001




Retail Trade within Australiaestimated to be worth around $130 B

Supermarkets36%

Other food retailing13%

Appliances6%

Recreational goods6%

Pharmaceutical and other13%

Furniture and coverings

4%Clothing and soft

goods8%

Hardware4%

Department stores10%

8.5 Export and import trade

The total value of international trade for the 1999-2000 financial yearswas Imports - $110 Billion Exports - $97 Billion

Whilst an analysis of imports was partially covered under 8.2Manufactured Goods, a more complete summary is provided below,using the same classification method previously described.

The analysis in Table 8-4 and Table 8-5 shows the proportion ofcontainerised freight as a proportion of the total trade.




For imports, trade in containers totals around $67 Billion, whereasBulk shipments total almost $43 Billion. Containerised trade needsfurther dissection, to eliminate products that are not unitised andtherefore not stored and handled on pallets.

For export, Bulk shipments are the dominant movement type,comprising coal, grain, minerals and similar products. Containermovements on unitised products total around $48 Billion, with afurther $18 Billion of products which are containerised, howevernot unitised and therefore would not employ pallets for handlingand storage.

Expressed in value terms, containerised movements of unitisedproduct have grown around 8% per annum (compounded) since 1995,and consistent with other key trade statistics.

The total value of international trade for unitised product moved incontainers is around $70 Billion, and represents 33% of totalinternational trade. Consumer grocery and foods products totals around $13.5 Billion,

and predominantly an export movement Consumer non grocery and household items total $15.7 Billion,

and is predominantly an import movement Industrial products total $41.5 Billion, with $33 Billion in the

import direction.

Within the context of pallet standards, grocery and food products havedemonstrated the most significant requirement for pallet usage, withhousehold and industrial products allocating lower priority to theissue.




Table 8-4 Summary for import trade, segmented into the unitised classification

Flow Import $B trade $B trade

Sum of Value Year Annual growth rateMarket segment Category 1995-6 1999-00a) Consumer (grocery) Not containerised 166 266 12.5%

Containerised, semi bulk 687 891 6.7%Unitised, in containers 2,357 3,226 8.2%

a) Consumer (grocery) Total 3,210 4,383 8.1%b) Consumer (non Grocery) Not containerised 2,359 2,633 2.8%

Containerised, semi bulk - - -Unitised, in containers 7,620 11,947 11.9%

b) Consumer (non Grocery) Total 9,979 14,580 9.9%c) Industrial Not containerised 5,977 7,109 4.4%

Containerised, semi bulk 11,564 14,107 5.1%Unitised, in containers 25,072 33,457 7.5%

c) Industrial Total 42,613 54,673 6.4%d) Excluded Not containerised 19,239 32,894 14.3%

Containerised, semi bulk 2,751 3,556 6.6%Unitised, in containers - - -

d) Excluded Total 21,990 36,450 13.5%Grand Total 77,792 110,086 9.1%

Totals from above Not containerised 27,741 42,902 11.5%

Containerised, semi bulk 15,002 18,554 5.5%

Unitised, in containers 35,049 48,630 8.5%

Source: Derived from ABS 30.28 Merchandise Exports And Imports, By Commodity




Table 8-5 Summary for export trade, segmented into the unitised classification

Flow Export $B trade $B trade

Sum of Value Year Annual growth rateMarket segment Category 1995-6 1999-00a) Consumer (grocery) Not containerised 4,929 4,939 0.1%

Containerised, semi bulk 2,824 1,709 -11.8%Unitised, in containers 7,049 10,314 10.0%

a) Consumer (grocery) Total 14,802 16,962 3.5%b) Consumer (non Grocery) Not containerised 553 598 2.0%

Containerised, semi bulk - - -Unitised, in containers 2,412 3,715 11.4%

b) Consumer (non Grocery) Total 2,965 4,313 9.8%c) Industrial Not containerised 2,692 3,716 8.4%

Containerised, semi bulk 13,876 16,185 3.9%Unitised, in containers 6,592 8,044 5.1%

c) Industrial Total 23,160 27,945 4.8%d) Excluded Not containerised 33,813 47,451 8.8%

Containerised, semi bulk 452 581 6.5%Unitised, in containers - - -

d) Excluded Total 34,265 48,032 8.8%Grand Total 75,192 97,252 6.6%

Totals from above Not containerised 41,987 56,704 7.8%

Containerised, semi bulk 17,152 18,475 1.9%

Unitised, in containers 16,053 22,073 8.3%

Source: Derived from ABS 30.28 Merchandise Exports And Imports, By Commodity




8.6 Value of Market Segments

A composite model for unitised productdeveloped from the previous summaries isprovided in Figure 8-4 opposite.

This figure shows the overall value of unitisedproduct from all sources and used within theAustralian market to be around $154 B.

This can be compared with the value ifinternational trade in unitised products, whichis estimated to be around $70 billion (refer topage 32).

Exports and Imports for unitised product arelater compared to the domestic market value.

Figure 8-4 Value of the major Market Segments for unitised goods within the Australian market




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Market value segmentation ($B)unitised products

0

50

100

150

200

250

300

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Consumer - non grocery

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8.7 Conclusions

Pallets are not used in all supply chains. Generically, three typesof supply chains exist for the purpose of categorisation herein,which are:

o Bulk shipmentso Semi bulk shipments, typically in containers or as

“break bulk” consignmentso Containerised movements of unitised freight (pallets,

cartons, bags, etc.)

o It is the third group relevant to the study

Markets considered by this study are manufactured and primaryproducts, retail markets, and export/import international trade

Australia’s international trade is around $210 billion, howevertrade in unitised product represents around 35%, with the majorityof the balance relating to shipment of bulk commodities (coal,grain, minerals, natural gas, etc.)

The market value of Australia’s unitised/packaged products isaround $150 billion, comprising domestic production retained andimported product, for domestic consumption. This can besubdivided into consumer grocery ($54 billion), consumer nongrocery/household ($47 billion) and industrial ($53 billion). Eachsub-element has differential growth rates and trade imbalances,further influencing the composition of the market mix.

The growth rate for international trade is between 8-10%(compound), whereas domestic production and consumption isaround 3-4%




9. AUSTRALIA’S LOGISTICS TASK

9.1 The task in 2001

9.1.1 Limits of the definition and analysisDefining the Australian Logistics task has always been a complexprocess limited by the quality of the source data and the frequency ofthe survey process.

This analysis will be limited to Non bulk freight movements Inter-city movements by road, rail and sea Import and export movements by sea using containers

9.1.2 Volumes relevant to the analysis (2000)Within the context of this study, Australia’s supply chains aredominated by Local and short distance interstate distribution by road Long distance distribution by rail and coastal shipping International container shipments (export and import)

The volumes associated with each of these elements are shown in thefollowing table.

A conceptual model relating to the freight movements is provided inFigure 9-3 on page 42.

Table 9-1 Logistics volumes for relevant market segments (unitised/containerised)

Corridor Mode Volume of non bulkmovements

Local and shorthaul intrastate

Road More than 1BT9

Inter-capital citymovements

Road Rail Coastal shipping

40 MT10

10 MT 3.3 MT

International Sea freight as Import full containers Import empty containers Export full containers Export empty containers

17 MT 0 MT 13 MT 0 MT

Source: Various BTE and BIZ Shrapnel reports

9 BT = billion tonnes10 MT = millions tonnes




9.1.3 Road freight movements

Road freight dominates the movement of product between Sydney,Melbourne, Brisbane and Adelaide. Typically, product travelsbetween origin and destination on domestic pallets as 22 pallets per 13.7 metre trainer load (45 foot) 30 pallets per B-Double load

Table 9-2 Inter-capital road freight matrix 1998-99 ('000 tonnes)

MT (1998-9)

Sydney +NSW

Melbourne +VIC

Brisbane only

Adelaide +SA Other Total

Sydney +NSW 8.0 2.8 1.5 1.6 13.9 Melbourne +VIC 9.6 3.2 1.9 1.0 15.7 Brisbane only 1.9 1.3 0.3 0.2 3.7 Adelaide +SA 1.6 1.7 0.1 0.2 3.6 Other 1.5 1.1 0.1 0.2 2.9 Total 14.6 12.1 6.2 3.9 3.0 39.8

Destination

Ori

gin

Source: BIZ Shrapnel11

11 BIS Shrapnel – Freight in Australia 3rd edition 1999-2004

9.1.4 Rail freight movements

Rail freight movements of unitised product, is undertaken withindomestic and ISO containers.

Domestic container sizes and configuration has been based on thedomestic pallet being accommodated two wide and therefore is widerthan the ISO standards pallet.

There is not a consistent approach to the operation of container loadingfor long distance transport.

Table 9-3 Use of domestic and ISO containers within long distant freight movements

Application Loading method

Domesticcontainers

Intercity stock transfers

Direct delivery onpallets

Hand stacking tomaximise cubic capacityProduct on pallets

ISOcontainers

Intercity stock transfers Hand stacking tomaximise cubic capacity

Rail movements of non-bulk unitised product totals around 10 milliontonne per annum.

9.1.5 Sea freight movementsSea freight movements relevant to the study involve internationalmaritime freight and coastal shipping freight.




9.1.5.1 International shippingAustralia’s maritime shipping task has been growing at around 8% perannum and currently totalled 3.1 million TEU’s in 1999-200012.

Whilst fluctuations in the balance between imports and exports occursfrom time to time, the long term average between full and emptyimport/export containers is shown in Figure 9-1 following.

Note that these volumes include the costal shipping volumes shown inthe next section, as relevant to port activity.

The following table is a composite derived from various sources toprovide a view of containerised freight as at 1998-9, totalling 31million tonnes.

Table 9-4 Summary of container activity for 1998-9

1998-9 ValueQty Unit $B

Total shipments by seaExport (1998-9) 432 mt 90 Import (1998-9) 57 mt 101

% containersExport 3 % 40 Import 30 % 66

Container shipmentsExport 13 mt 36 Import 17 mt 67

Volume

12 BTE Waterline Report September 2000 – Table 9 – TEU Throughput at the FiveMajor Australia Ports (1995-2000)

Figure 9-1 Apportionment of container flows as full and empty imports and exports in2000

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% Split of 5 major port volumesas at 2000, totalling 3.1m TEU's

Import Full TEU's43%

Import Empty TEU's

7%

Export Empty TEU's13%

Export Full TEU's37%

Graph and % split assumes balance of import ad export flows over the long term

Figure 9-2 5 Ports volume of container flows in 2000

Container balances - 12 months to June 2000

0

100

200

300

400

500

600

700

ImportsSYD

ExportsSYD

ImportsMLB

ExportsMLB

ImportsBRS

ExportsBRS

ImportsADL

ExportsADL

ImportsFRE

ExportsFRE

'000 TEU's

Full TEU's Empty TEU's

Note that marginal imbalances between imports and exports led to build up in container storage through 2000, however has been resolved.




The percentage of 12 metre containers has been steadily growingsince March 1999 from 28% to 34%13.

Note that the national average is 1.33 TEU’s per container moved, andis a function of the mix to 6 and 12 metre containers.

9.1.5.2 Coastal shipping

Coastal shipping volumes around Australia have maintained a grossvolume of around 48 million tonnes since 1995, however, has seen astrong growth in containerised freight and general freight, particularlywith the advent of single and continuing voyage permits.

Containerised freight moved by all coastal shipping totalled around3.04 million tonnes in 1998-914. Today the volume is estimated to bearound 3.3 million tonnes and equivalent to more than 250,000TEU’s. This can be seen as a subset of the total 3.1 million TEU’sidentified within the previous section.

Coastal shipping relevant to this study relates to movements’ to/fromTasmania and Western Australia, with the balance of relating to NorthQueensland and Gulf shipments.

For the purposes of the model developed in this study, the followingvolumes are identified.

13 BTE Waterline report Issue 27 – June 2001 – Table 1 (page 3)14 BTE Information Paper 46 – Coastal Freight in Australia (1998-99)

Table 9-5 Summary of Coastal Shipping of Containerised freight

Tonnes (MT) Equivalent ‘000 TEU’sTo Tasmania 1.5 100From Tasmania 1.4 90To WA 0.4 55From WA - 10Total 3.3 255

The movement of empty containers to WA by sea arises out of the needfor container balancing between Australian ports. Annually, around20,000 empty TEU’s are moved from the east coast to Perth.

Recognising that WA is a “net receiver” of domestic freight, mostdomestic containers sent to WA are returned empty to the east cost

This movement can be assessed in two different ways

a) The marginal cost of moving an empty container for balancingpurposes is around $500 per movement, and at 20,000 TEU’s perannum, this represents a total cost of $10 million per annum. Themarginal cost of returning the empty domestic container istherefore around $10 million per annum.

b) The movement of an empty container represents a lostopportunity, where a parallel movement exists; such movementsincluded road and rail movements of goods to Perth. In thiscontext, a freight cost of $1500 per journey can be used,representing a total annual opportunity cost of $30 million.




Figure 9-3 Supply chain configuration incorporating road, rail and sea freight movements on unitised non-bulk products

Sea port

Freight Station

Cargo Node(stock

holding)

Local customer

Interstate customer

FCL cargo

LCL cargo

Coastal shipping as single voyage permits

Empty container repositioning

Interstate freight movementroad, rail, sea

Import/export movements

Local freight movement

Sea portDomestic

production

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Import/export movements

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9.2 Domestic palletstatistics

The pallet pooling industry withinAustralia is valued at around $200million revenue per annum, and issuesapproximately 40 million pallets andrelated equipment per annum. Asegmentation by market sector isprovided below.

Two-thirds of the issues are utilised bythe consumer marker sector, with thepredominant user being themanufacturing base, despite the fact thatit is the retailers that specify palletstandards within the chain.

Table 9-6 Estimated volume for pallet issues per annum

Market Grouping Primary Manu-facturing

Whole-sale

Retail Distri-bution

Issues Issues Issues Issues Issues Issues % Issues % Food (Other) Consumer 100 11,200 300 100 300 12,000 30%Softdrinks Consumer - 5,000 - - - 5,000 13%Fruit and Vegetable Consumer 400 600 500 - 1,300 2,800 7%Consumer Goods (General) Consumer - 1,000 800 - - 1,800 5%Beer, Wine and Spirits Consumer - 1,300 400 - 100 1,800 5%Petfood Consumer 100 1,300 - - - 1,400 4%Meat Consumer - 600 200 - - 800 2%Pharmaceutical Consumer - 700 100 - - 800 2%Confectionery Consumer - 200 - - - 200 1%Cold Storage Consumer - - - - 200 200 1%Seafood Consumer - - - - - - 0%Dairy Consumer - - - - - - 0% 26,800 67%

Wood and Paper Products Industrial - 3,700 300 - 200 4,200 11%Miscellaneous Industrial 100 300 200 - 3,200 3,800 10%Chemical/Mining Industrial 100 2,600 100 - - 2,800 7%Plastic Products Industrial 200 1,200 - - - 1,400 4%Automotive Industrial 500 - - - - 500 1%Metal Products Industrial - 300 - - - 300 1%Building and Construction Industrial - 100 - - - 100 0%Industrial Equipment Industrial - 100 - - - 100 0% 13,200

Totals 1,500 30,200 2,900 100 5,300 40,000 100% 40,000 100%% 4% 76% 7% 0% 13% 100%

Totals Estimated pallet issues by market sector '000

Source: Industry data based on 2000-1 full year




9.3 Growth forecasts

The following table summarises a set of key market indicators to beused in subsequent analyses, particularly relating to the growth in taskand change in the task mix over the next 15 – 20 years.

Table 9-7 Summary of key market indicators

Key Market indicators

1992-3 2000-1 Years% annual growth rate

(compounded)Retail turnover (sales+profit) $B $B

Consumer - grocery/food 49.3 58.7 8.0 2.2%Non grocery/other 64.7 88.3 8.0 4.0%

Total 114.0 147.0 8.0 3.2%


(compounded)Indices of Industrial production Index Index

Manufacturing 82.1 102.8 8.0 2.9%Food/Beverage 82.2 104.7 8.0 3.1%Metals 83.1 95.3 8.0 1.7%Total Industrial 83.0 104.7 8.0 2.9%

Manufacturers Sales and inventory (Chain volume measures)


(compounded)$B $B

Sales 187.1 233.6 8.0 2.8%Inventory 26.0 31.8 8.0 2.5%

Source : ABS Australian Economic Indicators 1350.0

9.4 Transport indicators

Growth within international and domestic supply chains demonstratesthe fact that while the overall task has been growing at around 3-4% perannum (compound) consistent with GDP, the mix of the task has seencontrasting growth.Figure 9-4 Transport and Storage output and Gross Domestic Product15

Growth in port throughput has been around 8-9% compounded growthsince June 1993, as shown over page.

Figure 9-5 Trend analysis for container throughput for the five major ports16

15 BTE Transport Indicators sourced fromwww.dotrs.gov.au/bte/docs/indicate/transgdp.htm




JB Were and Macquarie Equities have identified that whilst containergrowth volumes are expected to be around 5-7 percent in fiscal 2002,the long-term forecasts, estimates of 8 to 8.5 percent are expected17.

16 BTE Transport Indicators sourced fromwww.dotrs.gov.au/bte/docs/indicate/totcont.htm17 Australian Financial Review – 20 June 2001 – “Corrigan pushes ahead with LangCorp transformation”

9.5 The market mix of the logistics task

Assessing the need for “harmonising” pallets and containers, existswithin an assessment of the relative size of key market segments forinternational and domestic markets and flows.

Domesticconsumption(as proxy for

domestic transport)

Production Exportmarkets

Internationalproduction

From the preceding, domestic transport follows the demand in domesticconsumption, whereas, international transport (and the need for ISOcontainers) is experiencing growth rates double that of domesticconsumption.

The following table provides a composite summary derived from thepreceding sections, and based on the total $154 Billion, being the valueof the unitised product within the market.

The modelled growth (b) reflects a more conservative forecast thanreported in the various data references used, and maintains logic withinthe internal relationships of the data when extrapolated 20 years.




Table 9-8 Summary of the current and modelled growth by market sector


Current Growth

(a)

Modelled Growth (b) 2001

Comsumer (Food/grocery) Dom. Production 4.2% 61 Export 11.6% 10.0% 10 Import 9.2% 9.0% 3 Dom. Consumption 2.6% 2.6% 54


Current Growth

Modelled Growth 2001

Consumer (Household) Dom. Production 4.3% 39 Export 13.5% 9.0% 4 Import 14.2% 7.0% 12 Dom. Consumption 4.6% 4.6% 47


Current Growth


Industrial/Other Dom. Production 0.9% 29 Export 5.5% 4.0% 8 Import 8.4% 5.0% 32 Dom. Consumption 3.3% 3.3% 53


Current Growth


Total Dom. Production 3.7% 129 Export 8.2% 22 Import 5.9% 47 Dom. Consumption 3.5% 154

Ratio international trade to consumptionComsumer (Food/grocery) 25%Consumer (Household) 33%Industrial/Other 75%Total 45%

From the table, International trade for Consumer/grocery/food is around 25% of the

domestic consumption, and expected to grow significantly, alignedwith growth in export agri-business

Consumer/non-grocery/household products yield around 33%international trade as a % of domestic consumption

Industrial products yields a significant 75% for the same measure.

Table 13-3 on page 68 titled “Assessment of growth scenarios based onalternative task apportionment and predicted growth forecasts” providesannual estimates for growth, and indicates the importance ofinternational supply chains and sources of supply and demand.

9.6 The task in 2020

The following charts indicate the potential market values for each marketsegment for years 2010 and 2020, based on the forecasts in Table 9-8 andTable 13-3




Figure 9-6 Consumer (Grocery and food) - Market value estimates based on growthforecasts

Consumer - Grocery and food market growth

-

20

40

60

80

100

120

140

160

2001 2010 2020

$B value

Dom. Production Export Import Dom. Consumption

Figure 9-7 Consumer (Non-Grocery and household) - Market value estimates basedon growth forecasts

Consumer - Non Grocery and Household market growth

-

20

40

60

80

100

120

2001 2010 2020

$B value


Figure 9-8 Industrial/Other - Market value estimates based on growth forecasts

Industrial and "other" market growth

-

20

40

60

80

100

120

2001 2010 2020

$B value


Figure 9-9 Totals (All market segments) - Market value estimates based on growthforecasts




All markets growth

-

50

100

150

200

250

300

350

2001 2010 2020

$B value


9.7 Implication of the future task

International trade and the supporting supply chains will becomeincreasingly more important over the next 15 – 20 years forAustralia’s logistics processes. Consumer/grocery/food products will see international trade

increase to be around 70-80% of its domestic consumption Consumer/non-grocery/household products will increase to around

40-60% of its domestic consumption Industrial products will yield an outcome where the international

trade will equal its domestic consumption.

The following chart derived from Table 13-3 shows the expectedgrowth and fundamental change in the market mix and logistics task.

Figure 9-10 Forecast trade and consumption comparisons by market sector and total

Ratio % of international trade to domestic consumption

0%

20%

40%

60%

80%

100%

120%

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Comsumer (Food/grocery) Consumer (Household)Industrial/Other Total

Overall, for all market sectors, trade for unitised/containerised productswill increase to be around 70-80% of domestic consumption. Australia’s domestic land transport activities will become

increasingly connected to international supply chains and processes For export-oriented products, standards (and processes) will become

a function of market expectations for product quality, carton size andvalue added features

Australia’s capacity to increase its export markets will requireproducts that fit overseas distribution systems, and provide efficientmeans of supply to those markets.

For import-oriented products, standards (and processes) will becomea function of the prevailing production scales of economy.

Multi-national producers are economising on product range andreducing product heterogeneity. Markets will need to develop andestablish distribution systems that efficiently handle products thatcomply with global standards.




9.8 Conclusions

Whilst substantial reform has focussed on domestic transportwithin Australia across road, rail and coastal shipping segments, itwill become more critical that Australia’s transport systems areintegrated with international supply and demand markets anddelivery channels

Products manufactured in Australia for export markets will need tomeet customer expectations for packaging storage andtransportability. Secondly these products must not also conform tocustomer systems, without transferring non-conformance costsalong the chain. To fail to appreciate this dynamic will cause

o Customers to source products from alternate sourceso Manufacturers to nominate alternate economies for

their production platforms Global manufacturing and brand managers are consolidating with

a focus on Asia. Where Australia’s standards and systems do notcomply with the systems developed by these firms, the totallanded and distributed cost of goods will increase for Australia’sconsumers

Trade in products which are unitised/containerised will substantialincrease as a percentage of domestic consumption.

Table 9-9 Growth rates and value by market segment forecast for 2010 and 2020


Current Growth

(a)

Modelled Growth (b)

2001 $B

2010 $B

2020 $B

Comsumer (Food/grocery) Dom. Production 4.2% 61 85 134 Export 11.6% 10.0% 10 24 63 Import 9.2% 9.0% 3 7 16 Dom. Consumption 2.6% 2.6% 54 68 88

Consumer (Household) Dom. Production 4.3% 39 56 86 Export 13.5% 9.0% 4 8 19 Import 14.2% 7.0% 12 22 43 Dom. Consumption 4.6% 4.6% 47 70 110

Industrial/Other Dom. Production 0.9% 29 33 34 Export 5.5% 4.0% 8 11 17 Import 8.4% 5.0% 32 50 81 Dom. Consumption 3.3% 3.3% 53 71 98

Total Dom. Production 3.7% 129 175 255 Export 8.2% 22 44 99 Import 5.9% 47 79 141 Dom. Consumption 3.5% 154 209 297

Ratio international trade to consumptionComsumer (Food/grocery) 25% 46% 90%Consumer (Household) 33% 43% 57%Industrial/Other 75% 86% 99%Total 45% 58% 81%


Container movements and volumes relevant to the pallet standardsissue are

o Imports – 375,000 TEU’so Exports – 400,000 TEU’so Coastal shipping

Tasmania - 190,000 TEU’s Other - 35,000 TEU’s

The movement of empty ISO containers to WA and empty domesticcontainers from WA yields a marginal cost around $20 million perannum and also represents an opportunity cost of $40 million




recognising that parallel freight movements by rail and road areundertaken. It is considered that harmonisation between ISOcontainers and the product footprint (pallet) would address thiscost, whether considered in a marginal or opportunity costtreatment.

Australia’s pallet pool system is valued at $200 million perannum, and generates around 40 million pallet issues. There arearound 15 million pallets in circulation




10. PALLET USAGE AND INTERNATIONALTRADE

There are for prevailing pallet standards adopted globally.

Table 10-1 provides a summary of geographical distribution of palletstandards.

The dominant regions of most influence to Australian trade areChina/South east Asia/North America, which utilise the ISO pallet of1200 x 1000mm. Around two thirds of Australian trade is withcountries that utilise the ISO standards. Considerable debate isunderway in Europe to align pallet standards. In that region there isan unwavering belief that the ISO standard provides operationalbenefits through reduced handling occurrences. A key advantage usthe carton modularity/standard of 600 x 400mm, which provides forharmonisation with wither pallet standard.

The document pallet standard in Japan and Korea is the 1100 x1100mm pallet, however Korea appears to “tolerate” a proliferation ofpallet sizes with the 1200 x 1000mm ISO pallet being the second mostpopular standard.

Discussion with a number of sources have indicated a measure offrustration by multinationals and ECR Asia, regarding Japan’sreluctance to embrace the ISO standard. However, it is consideredthat Japan (like Australia) will not be able to resist the emergence ofthe ISO standard over the long term.

Japan and Korea represent around 15% (by volume) of Australia’s exporttrade and 10% of the import trade.

The following sections provide more detailed analysis of import/exporttrade volumes as measured by containers

o Growth trends 1995 – 2000o Distribution of container volumes across unitised and non

unitised package typeso Distribution of volumes by pallet standard and growth trend

Table 10-1 Geographic distribution of pallet standards

1200 * 1000 1200 * 800 1100 * 1100 1165 * 11651219 * 1016

USA Germany Japan AustraliaCanada France KoreaMexico ItalyChile SpainUnited Kingdom SwedenNetherlands SwitzerlandFinland AustriaSouth AfricaSingaporeHong KongMalaysiaIndonesiaThailandPhillipinesNew Zealand

India *Middle East *

* emerging




10.1 Import-oriented containers

Import orientated containers conservatively around one third ofimport containers carry unitised product which is transferred to palletson arrival.

Product imported from countries that use ISO pallets account foraround 60%, growing at 5% per annum. By volume, imports aregrowing at 6.5% per annum.

Table 10-2 Import containers by market segment and pack type


Table 10-3 Import containers by pack type and pallet standard at origin


10.2 Export-oriented containers

Around 35-40% of export containers carry product which are regarded asunitised, with almost 70% by volume bound for export markets utilisingISO containers.

Growth to markets that utilise the ISO pallet is 10% per annumcompounded, whereas growth to markets using the 1200 x 800 Europallet is 17%. These markets account for 80% of exports.

Table 10-4 Export containers by market segment and pack type


Table 10-5 Export containers by pack type and pallet standard at destination





10.3 Conclusions

Trade to/from containers that use ISO pallets account for 60-70% byvolume, with imports growing at 5% and exports at 10%

The following table summarises the key results.

Table 10-6 Container movements by pallet standard

Pallet size Imports Exports




Non Standard ‘000 TEU’s 15 23% total 4 5% growth 6 10

TOTAL ‘000 TEU’s 370 400




11. OPERATIONAL IMPLICATIONS

The operational elements inherent within the pallet standards debatecan be identified as follows: Changes to warehousing and racking requirements resulting from

pallet sizes changes Cartons standards and perceived and real costs associated with a

proliferation of carton sizes and additional stock keeping units(SKU’s)

Cubic utilisation within the pallet envelope (as footprint times thenumber of layers L * W * H)

Pallet loading and configuration onto trucks Labour impacts resulting from increased number of items to be

handled/lifted Associated ancillary and mechanical handling equipment Physical adjustments to the pallet

The debate over the last five years focussed on operational andtactical issues and the cost of adjusting infrastructure to accommodatethe ISO pallet standard.

The GISCC study summarised in section 5.1 on page 5 of this reportidentified substantial benefits of harmonising the carton to the pallet,which was on the whole sufficient to offset the cost of infrastructureadjustment; such capital costs were estimated to be $1.1 Billion, ofwhich 75% related to warehousing expansion and racking adjustment.

11.1 Arguments to retain 11652 pallet

Operational arguments supporting the retention of the Australian palletcan be summarised as follows: A change to the ISO pallet will lead to a 12.5% reduction in the pallet

foot print, which in turn increases the number of handling occurrenceto move the same volume of freight. Labour costs therefore increase.

The area set aside for racking can be decreased by 4% toaccommodate the same number of pallet locations, offset by anincrease in pallet locations by 12.5% to accommodate the samevolume of freight.

Racking costs to dismantle, re-fabricate and reassemble to the newconfiguration

Road trailer utilisation would decrease by 3%, from 94% to 91%, dueto a change in pallet foot print, which could be offset by wider trailerdimensions (to 2.6 metres) or a greater proliferation towards 14.6metre trailers (48 foot)

Aligning pallets to ISO containers does not lead to loading productinto containers on pallets, due to a loss of cubic utilisation around 10-15%

Overall cost benefit is negative




11.2 Argument to adopt ISO pallet

Operational arguments supporting the introduction of the Australianpallet can be summarised as follows: Global manufacturing and logistics processes are dominated by

the ISO standard (60-70%), and the ongoing delay for adopting thestandard will increase the current inefficiencies, where ISOcartons are stored on 1165 mm2 pallets.

The inefficiencies are already accommodated within the supplychain, and harmonising on the ISO pallet will remove theinefficiencies with the need for increased capacity andinfrastructure.

The reduction in footprint can be accommodated by increasing thenumber of layers on a pallet, typically providing 15-20% increasein volume to footprint.

GISCC report identified “the catalyst needs to revolve around astandard set of carton sizes conforming with the pallet dimensionchosen”.

Adjusting the carton size to fit the Australian pallet contradicts thecountervailing trend towards ISO cartons

If Australia is to grow, then it needs to become export focussed,recognising that fact that it must present products that conform toits customers’ systems and avoid cost transfer. Should this notoccur, then the overseas markets will source product from othersuppliers/countries.

As manufacturers consolidate their manufacturing effort, Australianeeds to concurrently structure its supply chain based on alternatepoints of supply and standards.

Cost benefit assessments justify an adjustment in the short term,rather than ongoing non-conformance costs that escalate into thefuture

11.3 Storage issues

The GISCC Report in 1997 identifiedOptimising pallet fit on the 11652 pallet generates the maximum benefit(average 10% efficiency gain); this assumes optimisation based on 580xx 387mm carton, which does not comply with global standard of 600 x400mm carton.

If pallet fit were optimised concurrent with a move to the 1200 x1000mm pallet, the net (after capital investment) averages 1% savingscould offset the investment.

Given global trends over 15-20 years, it is unlikely that harmonisingaround the 580 x 387 mm module would occur.

The following diagram summarises the point.

Pallet integrity maintained Products re-palletised into new configuration, increasing handling costs

ISO carton sizes harmonised for ISO pallet

ISO carton sizes and configuration transferred to Australian pallet, causing overhang and under-utilisation

ISO cartons re-configured for Australian pallet leading to under-utilisation of foot print

Pallet integrity maintained Products re-palletised into new configuration, increasing handling costs

ISO carton sizes harmonised for ISO pallet

ISO carton sizes and configuration transferred to Australian pallet, causing overhang and under-utilisation

ISO cartons re-configured for Australian pallet leading to under-utilisation of foot print




Where the ISO pallet configuration I s placed on an Australian pallet,there is overhang by 35mm in one direction and underutilisation by165mm in the other direction. The net outcome is an under utilisationof the Australian pallet. This aspect was observed and discussed bycontributors to the study.

Where ISO cartons are re-configured there are handling costs andsimilar under utilisation in the footprint, due to “indivisibility” of thecarton unit.

Carton manufacturers based on ISO standards will only head tooptimal utilisation if used in conjunction with ISO pallets.

11.4 Pallet and order make-up

There is an increasing trend to ordering smaller quantities morefrequently, which provides Lower inventory High stock through put velocity

This has seen the emergence of the various pallets of multipleproducts.

The prevalence of the rainbow pallet provides increased flexibilitywhen “mixing and matching” for load make up and optimal cubicutilisation of truck and container space.

This has a direct relationship when considering truck interface issues,referred to in the next section.

Homogenous palletSingle product

Heterogeneous palletMultiple products• know as a “rainbow” pallet• product ordered as layers

Pallets separate each layer of products to facilitate “put away” processes at the retail distribution centre

Trend towards ordering SKU’s in smaller quantities and the formation of “rainbow” pallets

Homogenous palletSingle product

Heterogeneous palletMultiple products• know as a “rainbow” pallet• product ordered as layers

Pallets separate each layer of products to facilitate “put away” processes at the retail distribution centre

Trend towards ordering SKU’s in smaller quantities and the formation of “rainbow” pallets




11.5 Vehicle interface

Migration to the ISO pallet is not considered toyield any significant impacts on vehicle efficiency.

Considering the common 13.7mm (45’ trailer),which carries 22 x 11652 pallets and provide a totalfootprint of 28.8m2, a reduction of only 3.7%

A number of key issues emerge Unlike container traffic, road trailers

typically “weigh out, before they cube out”.Refer to Figure on Page

The prevalence of rainbow pallets providesan opportunity to utilise the 30-40% freespace typical in a trailer load

Migration to a 14.6m (48’ trailer) wouldyield an 8% increase in footprint over the13.7m trailer carrying 24 ISO pallets.

The same trends exist for B double trailerconfiguration.

Figure 11-1 Various combinations for trailer length and pallet size




2.2

m p

lus

tole

ranc

e 24 pallets @ 1.2 m2 = 28.8 m2

11 x 1.2m plus tolerance (20mm) = 13.4 m

Trailer length = 45 ft or 13.7 mFloor length, excluding end walls = 13.55Trailer length = 45 ft or 13.7 mFloor length, excluding end walls = 13.55


22 pallets @ 1.36 m2 = 29.9 m2

11 x 1.165m plus tolerance = 13.1 m

2.33

m p

lus

tole

ranc

e2.

2 m

plu

s to

lera

nce 26 pallets @ 1.2 m2 = 31.2 m2

11 x 1.2m + 1 x 1.0m plus tolerance (20mm) = 14.45 m


Note that diagrams are in PLAN

view, and the trailer area is

denoted by the area in black

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Australian pallet size

ISO pallet size

ISO pallet size

2.2

m p

lus

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22 pallets @ 1.36 m2 = 29.9 m2


2.33

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tole

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plu

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nce 26 pallets @ 1.2 m2 = 31.2 m2






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22 pallets @ 1.36 m2 = 29.9 m2


2.33

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nce 26 pallets @ 1.2 m2 = 31.2 m2






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Australian pallet size

ISO pallet size

ISO pallet size




Figure 11-2 Trailer utilisation, showing under-utilised capacity

2.2-2.4 m height

1.2-1.6mpalletheight

Cubic capacity of pantechnicon or tautliner= 13.55 x 2.4 x 2.3 m= 75 m3

Cubic capacity of product on 11652 pallets= 22 x 1.165 x 1.65 x 1.5= 45 m3

40% unused capacity

2.2-2.4 m height

1.2-1.6mpalletheight

Cubic capacity of pantechnicon or tautliner= 13.55 x 2.4 x 2.3 m= 75 m3

Cubic capacity of product on 11652 pallets= 22 x 1.165 x 1.65 x 1.5= 45 m3

40% unused capacity

11.6 Container loading

A considerable proportion of unitised freight is hand stacked intocontainers for international or coastal shipments, due to

Mismatch between the dimensions of Australian pallets, and theinternal dimensions of the ISO container

Different pallet sizes and configurations between Australian andoverseas supply and demand points

Inadequate or alternate handling methods

Low take-up of slip sheeting as a handling method in lieu ofpallets

Limited cooperation/coordination between origin anddestination handling points, and a resolution to accept the statusquo

A number of organisations interviewed outlined their desire to utilisethe ISO footprint to facilitate efficient container loading techniques.




Figure 11-3 Demonstrates the difference in loading/unloading techniques

ISO container1200*1000ISO pallet 1165*1165

Austn pallet

Handstacking of cases into the container to maximise the cubic capacity; stacking integrity lost

Sea journey

Unloading by hand to Australian pallet

Typical method

Under-utilisation of Austn. Pallet footprint

ISO container1200*1000ISO pallet 1165*1165

Austn pallet

Handstacking of cases into the container to maximise the cubic capacity; stacking integrity lost

Sea journey

Unloading by hand to Australian pallet

Typical method

Under-utilisation of Austn. Pallet footprint

ISO containerSea journey

1200*1000ISO pallet

1200*1000ISO pallet

Pallet removed from product base; stacking integrity maintained through alternate handling techniques (eg. Slip sheeting)

Unitised methodISO container

Sea journey

1200*1000ISO pallet

1200*1000ISO pallet

Pallet removed from product base; stacking integrity maintained through alternate handling techniques (eg. Slip sheeting)

Unitised method




11.7 Conclusions

The decision and supporting logic can be summarised in the followingmatrix.Table 11-1 Matrix for operational decision criteria

1165 * 1165 mm pallet 1200 * 1000 pallet

Current cartonsizes

Current situationidentified as yielding10% inefficiency inutilisation.EUL analysis identifies1.2-1.6% cost to sales ofsuch inefficiencies

Given certain % of casesizes are based on the ISOstandard, this option mayabsorb under-utilisedcapacity (and “slack”)


Recommended inGISCC report to be ofsignificant benefit, ifharmonised howeverignores global trendtowards ISO cartonstandards

Not considered as a viableoption


Increasing trend in thisdirection will proliferatecurrent inefficienciesfurther

Potential to off set nearterm adjustment costs forinfrastructure60-70% global activitybased on ISO standard forcartons and pallets




12. FINANCIAL ANALYSIS

12.1 Framework

It is beyond the scope of this study to develop industry specific or userspecific financial analyses and justifications for the introduction of theISO pallet.

Rather it is the intention herein to incorporate only the strategicelements relating to:

Implementation of EUL based on the ISO standards18. Thebenefits associated with EUL are reported to be between 1.2% and1.6% of sales, and would represent value foregone if Australiamaintained or expanded its distribution processes based on thecurrent pallet standards

Capital costs associated with converting the pallet pool to the ISOstandard; previously estimated to be around $7.00 per pallet. Themodel assumes a provision for $150 million, expanded over 10years. Similar adjustments are assumed for pallet machinery andracking at $50 million and $400 million respectively over 10 years

Operating benefits associated with unitised loading and unloadingof containers for international trade and coastal shipping

18 To harmonise carton and pallet sizes based on the Australian standard ignores theglobal trend towards the ISO standard, the expected demands/standards within newexport markets, and the rationalizing and implementation of global manufacturing

movements which yields benefits of $150 million per annum by year7.

Operating cost provision peaking at $100 million in year 10, to covermarginal expenditure for labour, forklift hire and consumables suchas slip sheeting. This is a broad estimate only.

The model assumes growth consistent with the Table 13-3 on page 68in the appendix

The model accommodates implementation over the first 10 years, andlimits benefits to a maximum of 20 years.

Not included within the calculation are operational or opportunity costsarising from to balancing and moving empty ISO containers around the nation while

maintaining and operating a domestic container fleet in parallel maintaining two production standards based on Australian and ISO

carton and pallet configurations

12.2 Cost Elements

Table 12-1 over page summarises the key differences that exist betweenthe GISCC study and this study for ILN. The ILN study provides for awider scope within the market and incorporates EUL benefits. and thesecondary benefits of container loading/unloading efficiency




Table 12-1 Summary of cost elements within financial summaryCost Element Notes

$m $mMarket segment

Grocery 30,000 54,000 Non Consumer Grocery - 47,000 Industrial - 53,000 Non unitised products - -

Pallet population (2001) 10.35 20.00 Pallet locations (2001) 5.00 10.00 Block stacked location 5.35 10.00

Product values per pallet ($)Grocery 1,500 1,500 Non Consumer Grocery 2,500 2,500 Industrial 3,500 3,500

Pallet throughput (millions)Grocery 20 36 Non Consumer Grocery - 19 Industrial - 15

Capital costsModification to existing pool 72.5 150 Increased for wider populationAdditional pallet requirement 27.0 0 Additional pallet requirement addressed with organic growth and harmonisatio with carton sizesModification to pallet machinery 21.0 50 Marginally increased to allow for inflationModification to existing rack/MHE 225.0 400 Indicative cost as pro-rata

Storage facility for additional pallets 777.6 0Ignored as inventory levels declining, stock turns increasing and harmonisation with carton sizes tack up available slack in pallet under-utilisation

Modification to transport fleet 72.0 0Ignored as loading is becoming increasingly heterogeneous, allowing for mix ad match of pallets and products; footprint less that 5% difference

Operational costsLabour 45.6 Nominal provision, although not consisdered likely

MHE equipment 17.2 50Allow for increased cosnumerable for slip sheets for 10 million sheets used per annum, at 3 "re-uses" at $20 each, plus increased lease costs for equipment

Operational benefitsAssumes that product integrity is maintained and product loaded into containers in pallet lots using slip sheets or similar

Container loading for international 25.3 116 As at 2001, 775,000 TEU's handled which are loaded with unitised freight, @ $150 per TEUContainer loading for coastal 34 As at 2001, 225,000 TEU's handled which are loaded with unitised freight, @ $150 per TEU

150Inventory and ECR benefits

Harmonise carton to pallet @1.2%Assumes harmonisation applicable to part inventory at the benefit applicable to Europe; Australia rate at 1.64% for grocery only

Grocery Note 1 - 486 Assumes 75% inventoryNon Consumer Grocery - 282 Assumes 75% inventoryIndustrial - 159 Assumes 50% inventory

927

Note 1. GISCC study considered the benefits of ECR/EUL strategies external to the question of pallet standards

GISCC report ILN study




12.3 Discounted cash flow and NPV assessmentsTable 12-2 Project inventory and other costs and benefits

Oper-ating

Costs

Net Cash flows

Inflation factor

Inflated cash flow

Year

Effic

ienc

y ra

te

Gro

cery

Non

gro

cery

Indu

stria

l

Gro

cery

Non

gro

cery

Indu

stria

l

Tota

l

Impo

rt T

EUs

Expo

rt T

EUs

Tota

l TEU

s

Inte

rnat

iona

l sh

ippi

ng

Coa

stal

shi

ppin

g

Palle

t Poo

l mod

s.

Palle

t mac

hine

ry

mod

s.

Rac

king

adj

ustm

ent

Growth Growth Growth Share Share Share Growth Growth @ $175/TEU * Eff. Rate

Growth @ $175/TEU * Eff. Rate

2.6% 4.6% 3.3% 75% 75% 50% 8% 8% 175.00$ 5% 175.00$ 150 50 400 3%1.2% 1.2% 1.2%

$M $M $M $M $M $M $M $M000

TEUs000

TEUs000

TEUs $M000

TEUs $M $M $M $M $M $M2001 10% 54,000 47,000 53,000 49 42 32 123 10 375 400 775 14 100 2 15 5 40 68 1.000 68.01252002 20% 55,404 49,162 54,749 100 88 66 254 20 405 432 837 29 105 4 15 5 40 207 1.030 213 2003 30% 56,845 51,423 56,556 153 139 102 394 30 437 467 904 47 110 6 15 5 40 357 1.061 379 2004 40% 58,322 53,789 58,422 210 194 140 544 40 472 504 976 68 116 8 15 5 40 520 1.093 568 2005 50% 59,839 56,263 60,350 269 253 181 704 50 510 544 1,054 92 122 11 15 5 40 696 1.126 784 2006 60% 61,395 58,851 62,342 332 318 224 874 60 551 588 1,139 120 128 13 15 5 40 887 1.159 1,028 2007 70% 62,991 61,558 64,399 397 388 270 1,055 70 595 635 1,230 151 134 16 15 5 40 1,092 1.194 1,304 2008 80% 64,629 64,390 66,524 465 464 319 1,248 80 643 686 1,328 186 141 20 15 5 40 1,314 1.230 1,616 2009 90% 66,309 67,352 68,719 537 546 371 1,454 90 694 740 1,434 226 148 23 15 5 40 1,553 1.267 1,967 2010 100% 68,033 70,450 70,987 612 634 426 1,672 100 750 800 1,549 271 155 27 15 5 40 1,811 1.305 2,362 2011 100% 69,802 73,691 73,330 628 663 440 1,731 100 810 864 1,673 293 163 29 1,953 1.344 2,624 2012 100% 71,617 77,081 75,749 645 694 454 1,793 100 874 933 1,807 316 171 30 2,039 1.384 2,822 2013 100% 73,479 80,627 78,249 661 726 469 1,856 100 944 1007 1,952 342 180 31 2,129 1.426 3,036 2014 100% 75,389 84,335 80,831 679 759 485 1,923 100 1020 1088 2,108 369 189 33 2,224 1.469 3,267 2015 100% 77,349 88,215 83,499 696 794 501 1,991 100 1101 1175 2,276 398 198 35 2,324 1.513 3,515 2016 100% 79,360 92,273 86,254 714 830 518 2,062 100 1190 1269 2,458 430 208 36 2,429 1.558 3,784 2017 100% 81,424 96,517 89,101 733 869 535 2,136 100 1285 1370 2,655 465 218 38 2,539 1.605 4,074 2018 100% 83,541 100,957 92,041 752 909 552 2,213 100 1388 1480 2,868 502 229 40 2,655 1.653 4,388 2019 100% 85,713 105,601 95,078 771 950 570 2,292 100 1499 1598 3,097 542 241 42 2,776 1.702 4,727 2020 100% 87,941 110,459 98,216 791 994 589 2,375 100 1618 1726 3,345 585 253 44 2,904 1.754 5,093

Discount rate 30%NPV 2,458

Markets Inventory benefits Capital costsOperating benefits




12.4 Conclusions

The financial analysis allows for A capital expenditure of $600 million for adjustments to the pallet

pool, packaging & ancillary equipment over the 10 years The incremental increase in operating costs by $100 million over

the same period The benefits of ECR/EUL are applied to 75% of the market

segment for consumer grocery and non grocery products and 50%for industrial products

Unitised loading of containers is a substantial benefit

The analysis yields a positive NPV of $2.5 billion, assuming aninflation rate of 3% and a discount rate of 30% (pre-tax).

This NPV increases to over $5.1 billion of the discount rate isdecreased to 20%.

Prime-facie, there appears to be a substantial cost impact if the currentstandard is maintained, leading to non conformance costs arising fromthe “disconnect” between standards.




13. APPENDICES

Table 13-1 Scenarios "A" - "C" indicating growth in indices in the intervening years





Table 13-2 Value of market segments and determination of task size by segment

Segment Product group Value $B

Totals Value $B

Product value per

tonne

Tonnes (Million)

Pallet issues (Million)

Consumer Grocery Processed food + agricultural products 43 10%Non processed agric. products 7 7%"Other" products 4 54 2000 27 45

Consumer Non-Grocery Department/variety store 15Hardware + furnishings 15Pharmacy 17 47 3000 16 26

Industrial Wood and paper manufacturing 18 9%Fabricated metal product manufacturing 8 7%Photographic and scientific equip mfg. 5Electronic equipment 8Electrical equipment and appliance mfg. 7Miscellaneous mfg. 7 53 4000 13 22

2%5% 1 56 93

Not included Fuel chemicals 34Other machinery incl. Transport 30Mineral products 10Printing and Publishing 16Metal 38 128

Totals from above 128.05

Check total Manufacturing, export, imports 258Agricultural products 24

282




Figure 13-1 Australian manufacturing - production, exports, imports and consumption by market sector

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49.9

8.4

16.3

12.2

35.7

10.4

32.2

42.0

6.4

13.2

2.6

1.4

0.5

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10.0

20.0

30.0

40.0

50.0

60.0

Food, beverageand tobacco

mfg.

Textile,clothing,

footwear andleather mfg.

Wood andpaper product

mfg.

Prinitng,publishing andrecorded media

Petroleum,coal, chemicaland associated

product mfg

Non-metallicmineral

products mfg.

Metal productsmfg.

Machinery andequipment

Other mfg.

Market Segment

$B Value

Sales incl. Exports $B Exports $B Imports $B

�� Total Aust. Market $B




Table 13-3 Forward projections of production, export, import and consumption estimates based on derived growth indices, by market sector


Current Growth

(a)

Modelled Growth (b) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Comsumer (Food/grocery) Dom. Production 4.2% 61 63 66 68 70 73 76 79 82 85 89 93 97 101 106 111 116 122 128 Export 11.6% 10.0% 10 11 12 14 15 17 18 20 22 24 27 29 32 36 39 43 47 52 57 Import 9.2% 9.0% 3 3 4 4 5 5 5 6 6 7 8 8 9 10 11 12 13 14 15 Dom. Consumption 2.6% 2.6% 54 55 57 58 60 61 63 65 66 68 70 72 73 75 77 79 81 84 86


Current Growth

Modelled Growth 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Consumer (Household) Dom. Production 4.3% 39 40 42 44 46 48 50 52 54 56 59 61 64 67 70 73 76 79 82 Export 13.5% 9.0% 4 4 4 5 5 6 6 7 7 8 9 10 10 11 12 13 15 16 17 Import 14.2% 7.0% 12 13 14 15 16 17 18 19 21 22 24 25 27 29 31 33 35 38 41 Dom. Consumption 4.6% 4.6% 47 49 51 54 56 59 62 64 67 70 74 77 81 84 88 92 97 101 106


Current Growth

Modelled Growth 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Industrial/Other Dom. Production 0.9% 29 29 30 30 31 31 32 32 32 33 33 33 34 34 34 34 34 34 34 Export 5.5% 4.0% 8 8 9 9 9 10 10 11 11 11 12 12 13 13 14 14 15 16 16 Import 8.4% 5.0% 32 34 35 37 39 41 43 45 47 50 52 55 57 60 63 67 70 73 77 Dom. Consumption 3.3% 3.3% 53 55 57 58 60 62 64 67 69 71 73 76 78 81 83 86 89 92 95


Current Growth

Modelled Growth 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Total Dom. Production 3.7% 129 133 138 142 147 152 157 163 169 175 181 187 194 202 209 218 226 235 245 Export 8.2% 22 24 26 27 30 32 35 37 40 44 47 51 56 60 65 71 77 84 91 Import 5.9% 47 50 53 56 59 63 66 70 74 79 83 88 93 99 105 111 118 125 133 Dom. Consumption 3.5% 154 159 165 171 176 183 189 196 202 209 217 224 232 241 249 258 267 277 286

Ratio international trade to consumptionComsumer (Food/grocery) 25% 27% 29% 31% 33% 35% 37% 40% 43% 46% 49% 53% 56% 60% 64% 69% 74% 79% 84%Consumer (Household) 33% 34% 35% 36% 37% 38% 39% 40% 42% 43% 44% 45% 46% 48% 49% 50% 52% 53% 55%Industrial/Other 75% 77% 78% 79% 80% 81% 82% 84% 85% 86% 87% 89% 90% 91% 92% 94% 95% 97% 98%Total 45% 46% 48% 49% 50% 52% 53% 55% 57% 58% 60% 62% 64% 66% 68% 71% 73% 75% 78%





Table 13-4 Summary of Import Containers by Origin port for 1995 and 2000

Error! Not a valid link.Source: Analysis of data provided by TradeData (Victoria University)




Table 13-5 Summary of Export Containers by Destination port for 1995 and 2000

Error! Not a valid link.Source: Analysis of data provided by TradeData (Victoria University)




14. PUBLICATIONS AND RELATEDARTICLES




14.1 ECR Standard Pallet Implementation Project

INTRODUCTION

In today's competitive environment, the grocery industry is underintense pressure to provide consumers with better choice through theanticipation of their needs and at the same time, the elimination ofunnecessary distribution and inventory management costs.

The Efficient Consumer Response (ECR) movement began in theUnited States in 1993 in response to the recession to fulfill consumerwishes better, faster and at less cost.

WHAT IS ECR?

Efficient Consumer Response (ECR) is a strategy to improveconsumer choice, satisfaction and service and at the same time, reducetotal costs, inventories and physical assets. ECR requires distributorsand suppliers to focus jointly on the efficiency of the total grocerychain, rather than the efficiency of individual components.

It successfully stimulated consumers' expenditure and pulled the retailsector of the US and Europe out of recession in the 1990's. Such anindustry-led initiative is critical and timely given the current Asianfinancial crisis. The success of this initiative is dependent upon thecommitment by all parties in the supply chain to agree on standardsand work together in a mutually beneficial arrangement.

ECR benefits companies in terms of the reduction in supply chain andinventory costs, and the increase in sales through better response tocustomers' needs.

ECR Asia Council

Amidst the Asia economic crisis, ECR has now been established inAustralia, Hong Kong, Philippines, Taiwan, Thailand, Singapore,Malaysia, Korea, India, Indonesia and China. An Asian Joint IndustryCommittee known as ECR Asia Council has been formed in July 1999 tofacilitate the adoption of ECR or Supply Chain Management (SCM)practices in a consistent fashion across Asia, and to initiate thoseactivities where local ECR or SCM boards do not exist currently. TheCommittee is made up of members from regional suppliers, retailers,manufacturers and representatives from ECR organisations in Asia.

ECR Singapore

ECR Singapore was officially launched on 11 Aug 1998. The ECRBoard is jointly chaired by Mr Tan Kian Chew, Chief Executive Officerof NTUC Fairprice Co-operative Ltd and Mr Yap Yoon Kee, GeneralManager of Colgate-Palmolive (Eastern) Ltd, with the Singapore ArticleNumber Council (SANC), a division of the Singapore Confederation ofIndustries, providing the secretariat support. This industry-led initiativehas the following objectives:To improve consumer choice, satisfaction and serviceTo achieve a reduction of total costs, inventories and physical assetsTo remove unnecessary cost from the distribution system and make itmore responsive to consumer demandTo network with other national and regional ECR organisations

ECR Singapore focuses on three areas for continuous improvement




Supply management covers a number of initiatives designed toimprove the flow of products through the supply chain. Workinggroups were formed for the following areas:

Continuous ReplenishmentProducts with Short Shelf-LifePallet StandardisationRoll Cage (new working group formed in July 2000)

Demand management focuses on improving the assortment ofproducts offered to consumers, effectiveness of product promotion,new product introduction and the efficiency of related demandmanagement activities. The working group under this area isCategory Management. Category Management looks into efficientassortment, promotion and product introduction. It is a method formanaging complex changes that are occurring in consumer needs andshopping behaviour.

Enabling technologies are improvements that render support tosupply and demand management. This includes rapid communicationof accurate and complete information to all trading partners, throughtechnologies such as Electronic Data Interchange (EDI).Computerisation, including the application of automatic identificationand data capture techniques, will in turn lead to the standardisation ofdesign and specifications for trucks, containers and warehouses.Working groups were formed for the following areas:

Data AlignmentEDI StandardsBar-coding Standards & Point-of-SalesEducation & Training

The Pallet Standardisation Working Group

The working group on "Pallet Standardisation", co-chaired by theSingapore Productivity and Standards Board (PSB) and NTUC Fairprice,is the largest working group that looks into the reduction of supply chainand increase in productivity through standardisation of pallet sizes. Itsimplementation will result in labour reduction and minimal handling ofgoods.

Standardisation of pallet sizes will in turn allow standardisation oftrucks, containers and warehouse design for economy of space. Sub-groups of manufacturers, distributors, equipment suppliers and third-party logistics providers have also been formed to address issues ofconcern and the necessary industry adjustment required for theimplementation of standard pallet size(s) in their sectors.

PALLET SIZE STANDARDISATION

The Pallet Standardisation Working Group looked into the reduction ofsupply chain costs and increase in productivity through standardisationof pallet sizes. Issues of concern and the necessary industry adjustmentsrequired for the implementation of standard pallet size(s) in their sectorswere addressed by the working group during the third and fourth quartersof 1998. Surveys have been conducted among the working groupmembers to assess the current use of pallets and the impact of pallet sizestandardisation to the fast-moving consumer goods (FMCG) industry.The working group is made up of 35 members with 5 retailers, 15grocery and FMCG manufacturers, 2 distributors, 3 third-party logisticsproviders and 7 logistics equipment suppliers.




Benefits of Pallet Size Standard

Currently, there are 16 different pallet sizes in use in the market.Standardisation of pallets provides the platform for pallet exchange.In the ideal scenario, goods can be transported from the manufacturer,through the distributor, to the retail store on the same pallet. Byeliminating the need for manual transfer of goods to another pallet,productivity and work efficiency are improved. The reduction in bothlabour and handling of goods will reduce delivery and transfer costs.Standardisation of pallet sizes will in turn allow standardisation ofpalletisers, racking and warehouse design. This will result ineconomy of space and facilitate automation. Other benefits identifiedthrough the survey were:

Reduction of damaged goods losses through minimal manual handlingReduction in number of transportation tripsMinimisation of the wastage of palletsElimination of the need for sorting of palletsReduction of unloading time for suppliersReduction in warehouse storage cost

Recommended Pallet Size

The 4-way 1000mm x 1200mm pallet is recommended by the PalletStandardisation Working Group as the standard for the grocery andfast-moving consumer goods industry in Singapore. The standardpallet shall have a safe working load of minimum one tonne.

Fig 1 : Dimensions of the ECR Standard

Why 1000mm x 1200mm pallet?

Compatible with standard ocean going containers and the majority oftrucks

Dominant size used in Asia (China, Thailand, Malaysia, Indonesia,Philippines and Singapore)

Endorsed by ECR Asia Conform to International Standard - ISO 6780 'General-purpose flat

pallets for through transit of goods - Principal dimensions andtolerances'

Conform to Singapore Standard - SS 334 'Specification for TimberPallets'

Major retailers in Singapore have already adopted this standard Sufficiently wide for drive in racking

IMPLEMENTATION




During the initial stages, ECR Singapore has encountered thefollowing problems in the implementation of this pallet standard inthe FMCG industry:

Though a number of the Working Group members went ahead toimplement the pallet standard, some expressed the need to see somereal benefits of pallet standardisation before adopting such standard.There is a great deal of different pallet sizes currently being used bythe FMCG industry. There is a high replacement cost.To implement the recommended Pallet Standard, some members ofthe FMCG industry needed to change the sizes of the pallet racks.The changing of the size of the racks would involve the re-surfacingof the warehouse flooring, as most racks would be cemented to thefloor.To implement the ECR Pallet Standard in the manufacturing sector,the automated palletising equipment would in most cases need to bemodified to accept a different size pallet and there would also be aneed to adjust the speed and the conveyor belt configurations.Some of the forklifts currently being used in the FMCG industry aredesigned for a particular size pallet. New forklift blades would needto be acquired in these cases to handle the recommended 4-way ECRStandard Pallet.

In order to show the benefits of the implementation of the palletstandard despite the above-mentioned problems, a pilot project, ECRStandard Pallet Implementation Project was initiated to demonstrateto the fast-moving consumer goods (FMCG) industry thatproductivity and cost savings can be achieved through standardisation.

The objectives of the ECR Standard Pallet Implementation Project aredefined as follows:

To implement ECR Standard Pallet. To evaluate the benefits of the pilot ECR Standard Pallet

Implementation Project. To publicize the results of the pilot so as to encourage more

companies to adopt the usage of the ECR Standard pallet rental tosecure maximum benefits.

The length of this project is 12 months, starting from 3 January to 31December 2000. The 4 participating companies in this project are YHS(Singapore) Pte Ltd (YHS), Unilever Singapore Pte Ltd (Unilever),Grocery Logistics Singapore Pte Ltd (GLS), the logistics arm of NTUCFairprice Co-operative Ltd, which is the largest supermarket group with78 branches and annual turnover amounting to S$917.6 million in1998/99 and LHT Holdings Ltd (LHT).

Though, a number of large companies in Singapore have implementedthe use of the recommended pallet standard, there is a need to bothaccelerate the pace of and widen the implementation of the standardpallet in the FMCG industry to realise the benefits of interoperability assoon as possible and transform the industry. The take up pace of thestandard pallet is slow and the replacement rate cited by the workinggroup members has ranged from 2 to 10 years.

At present, there is no local data on the benefits of the implementation ofusing standard pallets. Hesitancy amongst the various players in theFMCG supply chain creates doubts about actual operational benefits thattranslate into real cost savings gained from using standard pallets. Thisissue of achieving interoperability within the FMCG supply chain in




Singapore by using a common platform cannot be realised and shownuntil a pilot study of the actual operational benefits is carried out.

A Project Steering Committee was formed to ensure this projectachieves its objectives and completes according to schedule. Thissteering committee will also institute various measurements to gaugethe benefits in the implementation of ECR Standard Pallet. To ensureobjectivity of the measurement, Singapore Polytechnic would act asan independent body in performing data collection and measurement.PricewaterhouseCoopers played the role of an advisor in this project.

Findings of Project

To ensure that the benefits are appropriately captured, an externalthird party was engaged to measure the productivity gains. Thebenefits were captured through the use of questionnaire, interviewinga list appropriate representatives from the participating companies andproper verification of data that were being collected.

Each participating company adopted the usage of ECR Standard Palletfor their operations under a pallet-pooling scheme since January 2000.

Singapore Polytechnic (SP) has conducted the first round ofmeasurement during 8 May - 1 July 2000 on the benefits of thisproject through data collection and measurement.PriceWaterhouseCoopers (PWC) played the role of an advisorthroughout this process.

4 students were attached to each participating company (YHS,Unilever, GLS and LHT) respectively for a period of 8 weeks during8 May – 1 July 2000. The second round of measurement will be

conducted during 6 November - 30 December 2000 (another duration of8 weeks). Thereafter, a complete report with findings and analysis willbe compiled at the end of the project in January / February 2001.

The number of ECR Standard Pallets used in the respective companies asof October 2000 is as follows: GLS: 11,549 YHS: 16,045 Unilever: 800

Some preliminary findings from the first measurement are as follows: Reduces time for sorting pallets Reduces time for loading and unloading goods Reduces multiple handling Reduces product damages due to multiple handling Reduces number of vehicle trips Reduces number of pallets needed Reduction in manpower needed Reduction in number of lost pallets Facilitates the concept of shared assets

From these initial findings, the pallet standardisation project has aninternal rate of return of 399%. This translates to a return of 4 times themoney invested in the project, where a significant portion of the benefitcame from increased productivity of labour and reduced cost ofownership. This figure will be re-confirmed in the final stage of theproject in December 2000.




ConclusionThe advantages of ECR Standard Pallet include: Reducing multiple handling of goods Facilitating delivery turnaround time Facilitating regional transport efficiencies Streamlining transport services Facilitating the concept of shared asset Facilitating the use of single material handling systems Facilitating palletised deliveries Streamlining packaging design process

The envisaged benefits for implementing ECR Standard Palletsthrough the pilot are as follows:

Standardisation: Driven by the need to simplify business processesSimplification: Removes unnecessary business practices and creategreater efficiency and effectivenessEfficiency: Result in cost savingsEnhanced business values: Increase in productivity and betterservice for consumers4-way Pallet: Entry points on all four sides enable loading beingdone on any sideFitting: Optimum space utilisation in warehouses as well as for mostlorries and sea freight containersRacking: To standardise on 1200mm and 1000mm to save space forwarehousingDeliveries: To facilitate efficient palletised deliveriesPallet Pooling: Reduces number of pallets used in the supply chainStreamlining: Streamlining of warehouses and distribution systems

Although the ECR Standard Pallet implementation project has not beencompleted, the preliminary findings (after nine months sincecommencement in January 2000) have been encouraging. Upon thecompletion of the project (scheduled in December 2000), the detailedfindings on the operational benefits that has been derived through the useof standard pallets, pallet pooling and leasing of pallets would be sharedwith the industry (and in particular the FMCG players). This would bedone through ECR Singapore.

Fig 2 : ECR Standard Pallets in use at Unilever’s warehouse




Fig 3 : ECR Standard Pallets in use at YHS’s warehouse

Fig 4 : Picking & loading of goods onto ECR Standard Pallets at GLS’s warehouse

Fig 5 : Palletised goods loaded onto trucks for delivery

Fig 6 : Stacks of new ECR Standard Pallets




Prepared by: Ms Jaslin Lau Wai LingECR Project ManagerSingapore Article Number Council




14.2 Efficient Unit Loads by A.T. Kearney

Efficient Unit Loads are absolutely key in improving transport,storage and handling efficiency across the total supply chain.

Unit loads play a key role across the supply chain, grouping primaryand transport products to facilitate transport and handling. Used bymanufacturers, retailers and service providers, unit loads are key costdrivers. They impact on transport, storage, handling and packaging,which together, represent 12-15% of retail sales price. Developingmore Efficient Unit Loads is critical to the success of ECR and isestimated to save 1.2% of retail sales price.

Efficient Unit Loads impact 12-15% of retail sales price. Savingsopportunities represents 1.2% of retail sales price

The Efficient Unit Loads (EUL) project is one of three ECR Europesupply side projects, whose ultimate objective is supply chainintegration. This can only be achieve by harmonising physical aspectsof the supply chain.

EUL Mission: To improve the efficiency and effectiveness of currentand future supply chains by promoting harmonisation and integrationof transport and storage items.

The traditional approach to supply chain management has been foreach player to optimise his part, often to the detriment of ‘total chain’efficiency. Thus, manufacturers have typically used pallets tooptimise space ut8ilisation and retailers have improved handlingproductivity by using roll cages. This disjointed approach hasresulted in unnecessary, non-value added handling, where loads are

often reassembled more than 10 times, at different stages in the supplychain.‘The challenge is to break the half chain view, where each participantfocuses on his part rather than on a total optimum’L. Henner Klein, A.T. Kearney, Geneva 1996.

The problem is compounded by a wide variety of unit load dimensionsacross Europe. There are too many standards and they differ fromcountry to country. Established international standards are not alwaysused and a widely applied, consistent set of European standards isrequired to achieve EUL harmonisation. This should be based on themodularity principle as this dramatically improves space utilisation.Within the European grocery industry the 600 x 400mm master moduleis widely accepted and is recommended in this Report as the basis forunit load dimensions. To achieve c=breakthrough results, all variableconstraints must be challenged, although fixed or genuine constraints arerecognised.

Unit load harmonisation is key to supply chain integration andbreakthrough results.

A wide range of secondary unit load dimensions is currentl;y in use,driven by primary product size. This proliferation adds complexity andshould be rationalised. Since space utilisation is key to EUL, availablespaces across the supply chain should be based on seven modules: fivebased on strict modularity with the 600 x 400 and two additionalmodules, representing shelf replenishment needs.

Secondary reusable transport items (RTI), such as boxes and crates, offersignificant potential savings for selected category flows. In order to limit




burgeoning proliferation and complexity, the EUL team recommendsestablishing RTI council to develop European standards.

Tertiary items are critical to the success of ECR.

More than 30 different pallet sizes and types are in use across Europe.These should be rationalised to four recommended plan dimensions.

Current pallet heights make poor use of vehicle inner heights, oftenbased on previous design. As a result, 15% of additional grocerytrucks are required. As vehicle technology develops and extra innertruck height is made available, pallet height standards need to beincreased. High cube and double stacking technologies should also bemonitored and pallet heights adapted to reflect developments.

Pallet height should be derived from inner truck height.

The current situation, in which manufacturers typically use pallets andretailers favour roll cages, is a barrier to Efficient Replenishment. Asscross-docked volume increases, the need for an integrated tertiaryitem – used across the total supply chain – becomes critical.

Suppliers of tertiary items need to develop a tertiary item whichcombines the advantages of pallets with those of roll cages to enableeffective cross-docking. The Dolly is one such item but is onlysuitable for those applications using RTI.

Technical developments are required to integrate pallets and rollcages.

EUL projected savings of 1.2% of retail sales price are not evenly spreadamong manufacturers and retailers. Retailers expect to gain threequarters of the savings, mainly through more efficient assortmentcreation and shelf replenishment. However retailers’ operational gainsare likely to be manufacturers’ investment needs. For example,switching to RTI to achieve more efficient retail shelf operations willrequire manufacturers to invest in the production line.

EUL opportunities are not equally spread between manufacturersand retailers.

Future pricing must incorporate a suitable compensation mechanism toensure that such investment takes place.

A clear vision, leadership and a long-term perspective are required toensure that projected ECR savings become a reality.

Efficient Unit Load developments require a process and categoryoriented approach.

In order to make best use of spaces available in the supply chain and tominimise the overall handling along the chain, the unit load design mustbe very process-oriented, together with the principal replenishment flowmodules, allowing category-specific increases in cross docking and breakbulk operations.

EUL make optimal use of spaces available in the supply chain andminimise handling.

This Report provides guidelines rather than standards. It should be usedby standards bodies, and by manufacturers, retailers and service

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providers, working together to design and operate Efficient UnitLoads supply chains. This will ‘fulfil consumer wishes better, fasterand at less cost’.











14.3 Efficient consumer response (ECR): asurvey of the Australian grocery industry

John K. Harris, Paula M.C. Swatman, Sherah Kurnia

The AuthorsJohn K. Harris, John K. Harris is an Analyst at Deakin University, Geelong,Victoria, AustraliaPaula M.C. Swatman, Paula M.C. Swatman is the Director of the InteractiveInformation Institute, RMIT University, Melbourne, AustraliaSherah Kurnia, Sherah Kurnia is a PhD candidate at the School of InformationManagement and Systems, Monash University, Australia

Abstract

Efficient consumer response (ECR) is a supply chain management strategy whichattempts to address the inefficiencies that have led to excessive inventory andunnecessary costs at all levels within the grocery industry supply chain. Althoughoriginating in the USA, ECR has also attracted attention and interest in many othercountries. This paper presents the results of an Australian study which was designedto assess the applicability of ECR within the Australian grocery industry. Theresults of the study indicate that the inefficient business practices of the US supplychain are also prevalent within the Australian grocery industry and that someAustralian companies had already begun to engage in business activities related toECR as early as 1996.

IntroductionEfficient consumer response (ECR) originated in the USA in 1992 as a direct resultof threats from alternative store "formats" (or types) and their supply chains(McKinsey & Co. 1992) which highlighted major inefficiencies within thesupermarket and its supply chain (Kurt Salmon Associates, 1993). In order tosurvive, the US grocery industry leaders took an initiative to study how to improvethe performance of the supermarket supply chains in 1992. As a result of their study,the ECR initiative was established, and the term "efficient consumer response"(ECR) was first introduced at the US Food Marketing Institute Conference inJanuary 1993 (Robins, 1994). This ECR initiative is concerned with transforming

the grocery supply chain from a "push system" to a "pull system" - where tradingpartners form new alliance relationships and the replenishment of store products isinitiated by the point of sale (PoS) data.

The concept on which ECR is based actually originated from the quick response (QR)strategy, already existing in the textile and apparel industries (Cooke, 1994; Fiorito etal., 1995). QR, in turn, is based on the manufacturing just-in-time (JIT) concept (Ellramet al., 1989; Fiorito et al., 1995; Knill, 1990). The JIT concept was simple: to deliverraw material to production areas in the exact required amount at the precise time it wasneeded. The use of raw material pulls new raw material into the production process.During the mid-1980s the JIT manufacturing concept was applied to the US textile andapparel industries in an attempt to combat market penetration by overseasmanufacturers. This textile and apparel industries initiative was termed "quickresponse" and attempted to reduce the amount of inventory held within the apparelsupply chain. Quick response required the retailer to share point-of-sale-scanned datawith manufacturers to improve the flow of product through the supply chain. Thegrocery industry noted the success of the quick response approach to managing supplychain data and proposed a similar stock replenishment system called ECR (Cooke,1994; Ellram et al., 1989; Fiorito et al., 1995).

Although ECR originated in the USA, the concept has attracted many Europeancountries and Australia. Research papers published in the last few years suggest thatthere has been an increasing level of interest among European manufacturers andretailers in the ECR initiative (Coopers & Lybrand, 1997; Coupe, 1995; Kurnia et al.,1998; Leggett, 1996; Peck, 1997; Wheatley, 1996). The importance and applicability ofECR to the European grocery industry became more noticeable in 1994 with theestablishment of the ECR Europe Executive Board, which promotes and advances theECR initiative in Europe (Davies, 1997; Penman, 1997).

In Australia, however, very little research has been conducted regarding theapplicability of the ECR initiative. At the beginning of this study, only one industrystudy (conducted by Coopers & Lybrand in 1995) could be found, the results of whichindicated that ECR would be effective in improving the state of the Australian groceryindustry.

ECR as a collaborative solution to adversarial trading




ECR calls for the creation of a timely, accurate and paperless flow of information -relying heavily on electronic data interchange (EDI) and strategic alliances betweensupply chain members (Fiorito et al., 1995; Sansolo, 1993). The goal of ECR is totake out of the supply chain costs which do not add consumer value (Robins, 1994).ECR is about producing efficiencies in the grocery supply chain within the four corebusiness process areas of efficient store assortment, efficient replenishment,efficient promotions and efficient product introductions (Kurt Salmon Associates,1993).

ECR Initiatives

(a) Efficient store assortmentThe objective of this initiative is to optimise the productivity of inventory and shelfmanagement at the consumer interface - the store level. Optimal allocation of goodson supermarket shelves (known as "store assortment") maximises consumersatisfaction by providing the best products and services while, at the same time,ensuring the most efficient use of available space to increase manufacturer,distributor and retailer profitability. The relationship between manufacturers,distributors and retailers is crucial in achieving efficient store assortment (KurtSalmon Associates, 1993; Wood, 1996). To streamline business practices in the areaof store assortment, manufacturers, distributors and retailers need to adopt a"category management" strategy (Kurnia et al., 1998; Pramataris et al., 1997).

(b) Efficient promotionThe efficient promotion initiative aims at maximising the total system efficiency oftrade and consumer promotions. Efficient promotion attempts to eliminateinefficient trade promotions (forward buying and diverting) by introducing betteralternative trade promotions such as "pay for performance" and "forward commit": pay for performance is concerned with rewarding retailers on the basis

of how many products they sell to consumers, rather than how manyproducts they buy from manufacturers (Washburn, 1995);

forward commit relates to spreading the actual shipment of one orderover several physical deliveries. This allows retailers to take the pricingbenefits offered by manufacturers at a particular period in time (just as inthe case of forward buying), without having to carry the inventory. Inessence, this technique operates on "virtual inventory" which will betransformed into "real inventory" when required (Martin, 1994).

The use of paper-based coupons as a consumer promotion technique can be replacedwith electronic coupons, frequent shopper systems, every day low price (EDLP)policies and other efficient incentive programmes. Thus, the efficient promotioninitiative endeavours to remove excessive costs by reengineering promotion practices,and is also supported by the "category management" strategy (Kurnia et al., 1998;Pramataris et al., 1997).

(c) Efficient product introductionThe objective of the new product introduction initiative is to maximise the effectivenessof new product development and introduction activities in order to reduce costs andfailure rates in introducing new products (Kurt Salmon Associates, 1993). This isachieved by the involvement of wholesalers/distributors, retailers and consumers at anearly stage of the new product development process. Manufacturers, distributors andretailers must work together as allies to reduce the costs of product development and toproduce only products anticipated and demanded by the consumer marketplace(Tripplet, 1994). Once again, the "category management" strategy plays a crucial role inachieving this initiative, because of its contribution to an understanding of successfulexisting products (Kurnia et al., 1998; Pramataris et al., 1997).

(d) Efficient product replenishmentThe efficient product replenishment initiative is the fundamental platform whichsupports the overall ECR strategy and it represents more than half the total savingsprojected from ECR implementation within the US grocery industry (Kurt SalmonAssociates, 1993). The objective of this initiative is to optimise time and cost in thereplenishment system by the provision of the right product to the right place at the righttime in the right quantity and in the most efficient manner possible. In order to removeinefficiencies in product replenishment (for example, high inventory levels and carryingcosts and sporadic manufacturing schedules), a "continuous replenishment program(CRP)" approach is required (Kurnia et al., 1998; Pramataris et al., 1997).

ECR business activitiesTo achieve these four efficiencies, ECR requires the following major business activitiesor initiatives (De Roulet, 1993): category management; continuous replenishment programme (CRP); computer assisted ordering (CAO); flow-through distribution (cross-docking); integrated electronic data interchange (EDI);

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activity-based costing (ABC).

(a) Category managementThe term category management first appeared in 1987 (Smith, 1993) when certainorganisations, such as Procter & Gamble (Mathews, 1995), began moving from"brand" management to management "by category". Category management hasevolved to mean a process that involves managing product categories as businessunits and customising them on a store-by-store basis to satisfy consumer demands(Gnau et al., 1992). A category is a group of products having a common consumerend use (Hofler, 1996) and includes such things as household cleaners, dairy andfrozen foods, paper products, health and beauty care products, soft drinks, etc.Category management allows the category manager to operate a category like abusiness so as to identify optimal product mix; and to stock each store with specificproducts that demographic and point-of-sale (PoS) information indicates customerswish to purchase. Category management is supported by EDI and barcodeapplications (Kurnia et al., 1998).(b) Continuous replenishment programme (CRP)Continuous replenishment, usually managed by the manufacturer, is a programmeused to control and monitor the movement of goods from the manufacturer to thewarehouse/ distributor (Garry, 1994c). CRP involves the manufacturer (rather thanthe retailer's warehouse) taking responsibility for replenishing the warehouseinventory, with the buyer supplying actual warehouse inventory withdrawal dataand data on "stock-keeping units" (individual line items) to the manufacturer (Cross,1993). CRP programmes reduce costs in distributors' inventory, but can increasesome costs, such as transportation costs, if the manufacturer ships smaller truckloads more frequently (Garry, 1994b). Successful CRP implementation is dependenton effective trade relations, requiring shared business practices and informationsystems which rely heavily on EDI.

(c) Computer-assisted ordering (CAO)Computer-assisted ordering, also known as "computer-aided ordering" (Fensholt,1992; Garry, 1992; Thayer, 1991; Weinstein, 1995), covers the second half of theoverall inventory supply chain - the movement of goods from thewarehouse/distribution centre to the retail store. The aim of CAO is to generate storereplenishment orders automatically, with minimal management intervention, basedon such things as current and historical PoS scan data, delivery data and salesforecasts. The benefits of CAO have been identified as labour savings anddependability, warehouse and shipping improvements, and inventory reduction

(Garry, 1994c). Traditionally, stores have based their orders on the re-order clerkmanually inspecting the store shelves and scanning the shelf-tag barcodes for thoseitems with limited stock on the shelf (Anderson, 1996). The re-order amount entered bythe clerk is based on the actual shelf amount and the ideal shelf quantity. The re-orderclerk is not in a position to take into account PoS data, inventory which has alreadybeen scheduled for delivery, or likely future trends based on forecasting. IntegratedCAO systems are designed to minimise (and even eliminate) these problems.

(d) Flow-through distribution (cross-docking)According to Garry (1994a) the purpose of flow-through distribution is to hasten theflow of products from the supplier to the retail store by reducing storage and handlingof products at the distribution centre or warehouse. It involves the breaking down ofpallets at the distribution centre, reassembling them for store delivery and then shippingthem to the retail store without ever storing the product in the warehouse. This requiressignificant investment in technologies such as EDI, barcoding and scanning of palletsand cases; and warehouse design changes such as lower ceilings and less racking. Thekey EDI transaction required for cross-docking is the Advanced Shipping Notice(ASN), to inform the distributor of the merchandise that is about to arrive. Theautomation of the warehouse inventory management system using barcodes means thatinaccuracies can be eliminated.

(e) Integrated electronic data interchange (EDI)EDI is the computer-application to computer-application communication of structured,formatted messages based on international standards, using electronic transmissionmedia with no manual intervention (Brawn, 1989; Swatman, 1993). EDI is a technologywhich allows structured information to be shared among organisations in the supplychain resulting in significant reductions in transaction costs and enabling theorganisations to adopt new and more effective and efficient business strategies(Emmelhainz, 1990; Gilmour, 1993; Klima, 1993; Spence, 1994), such as ECR. EDI isviewed as the essential effective enabler of the ECR management strategy because itfocuses on achieving integration across organisational functions and betweenorganisations (Swatman, 1993) in the grocery supply chain.

(f) Activity-based costing (ABC)Activity-based costing provides the cost and operating information necessary to supportinnovative management improvement initiatives such as ECR. The focus of ABC is onaccurate information about the true cost of products, services, processes, activities,distribution channels, customer segments, contracts and projects (Miller, 1996). ABC












supplies information about profits (where the money is being made) rather thanabout costs. Traditional accounting systems use gross margin calculations thatspread operating costs across all products based on unit purchase price regardless ofthe actual value chain (Porter, 1985) through which the product passes. ABCfocuses management's attention on controlling the source of costs, decisions thatcreate activities, rather than squeezing budgets. Therefore ABC as part of ECR canincrease the profitability of the supply chain by removing or reducing those costactivities that do not add value. This cannot be done with traditional systemsbecause they do not reflect costs accurately (Weinstein, 1993).Australian ECR surveyAt the start of this research project, little US and almost no Australian research intoECR could be discovered. We identified three academic research projects on ECRor continuous replenishment (Clark, 1994; Hoban, 1993; Mathews, 1995) in theUSA and in Australia we found only a single industry report undertaken for theGrocery Manufacturers of Australia by Coopers & Lybrand in 1995. We thereforedecided to commence the overall research project (which involves a number ofresearchers and is expected to take several years) by investigating Australianattitudes to ECR and existing practices by members of the grocery industry in thiscountry - an investigation which we believed was most appropriately addressed bymeans of a mail survey.

Participants were chosen from organisations within the Australian grocery industry(members of the grocery supply chain). The questionnaire was posted to the mostsenior executive of 1,500 companies within the Australian grocery industry, whosemailing lists were obtained from grocery industry journals (Retail World Pty Ltd,1995; White et al., 1995); and an effective response rate of 30 per cent, or 450organisations, was obtained after two mailouts of the questionnaire. The survey wasadministered between June and October 1996.

The research question under examination was "can Australian grocery industrysupply chain members benefit from the efficient consumer response supply chainmanagement strategy?" Industry supply chain members were surveyed to:

determine the extent of inefficient business practices; identify the current use of business activities (supply chain initiatives)

necessary for the adoption of the ECR strategy;

identify those organisations that are aware of the ECR strategy to discover whethertheir organisation (and the supply chain as a whole) can benefit from the ECRstrategy;

determine the reasons for adopting ECR by those organisations which have decidedto pursue such a strategy.

Inefficient business practicesFigure 1 shows that "diverting" is little used within the Australian grocery industry, asjust 17 per cent of survey respondents indicated that they use some form of diverting,and only 2 per cent stated that they used this practice the majority of the time. Dealselling/buying which results in forward buying, however, is prevalent within Australiaand, as a result, there are likely to be excessive inventory holdings throughout theAustralian grocery supply chain. Despite the greater than optimal inventory holdings,these figures suggest that inefficient promotional activities are used to a much lesserextent than in the USA and are therefore far less important as a motivator for ECR inthis country.

ECR business activitiesFigure 2 illustrates the various ECR initiatives and shows that category management(59 per cent) and EDI (49 per cent) have the greatest number of respondents committedto their implementation, while cross-docking (19 per cent) and continuousreplenishment (23 per cent) have the smallest number. Even though categorymanagement is more widely used than the other initiatives, only 10 per cent ofrespondents are committed to the implementation of this business activity as part oftheir ECR strategy (indicated as "Committed to Implementation (ECR)" in Figure 2),while the rest are using category management independently (indicated as "Committedto Implementation" in Figure 2). EDI (17.1 per cent) implementation as part of an ECRstrategy has by far the greatest commitment in terms of ECR strategy, while activity-based costing (4 per cent) and cross-docking (5 per cent) have the lowest respondentcommitment as part of their ECR strategy. These results suggest that, althoughAustralian grocery industry members are actively engaged in a number of the ECRinitiatives, they view each activity on its own merit - and have, thus far at least, shownlittle interest in integrating their improved supply chain management practices into anholistic ECR approach.ECR awarenessTable I shows that just over two-thirds (61 per cent) of respondents were previouslyaware of the ECR strategy, while another third (34 per cent) were unaware of ECRbefore receiving this survey. Two-thirds of the group of "aware" organisations are




actively engaged in pursuing an ECR strategy and, in Table II, we have summarisedthe reasons why these respondents are actively pursuing this strategy. This listmakes it clear that the "threat from alternative store formats" which motivates somany US supermarkets is of little importance to Australian grocery industrymembers.Figure 3 summarises respondents' views of the likely benefits of ECR to theAustralian grocery industry and shows that the majority of those respondents whoare aware of ECR believe the Australian grocery supply chain can gain significantbenefit from ECR in terms of improved efficiency (76 per cent) and reduced costs(61 per cent); and that the respondent's own organisation can benefit (61 per cent)from pursuing an ECR strategy. Of the total group of respondents, 47 per centbelieve that ECR will improve the efficiency of the grocery supply chain, while 37per cent of all respondents believe that ECR will remove costs from the supplychain and also benefit their own organisation.

Discussion and conclusionsOur research into ECR within Australia provides very strong evidence in two areas: 1 that the inefficient business practices of deal selling/buying and forward buying(Figure 1), which push excessive inventory into the supply chain, exist within theAustralian grocery industry although not necessarily to the same extent as in theUSA. 2 That Australian organisations have begun implementing business activities andinitiatives that are essential for the adoption of the ECR strategy.

These results suggest that the Australian grocery industry is a "push system", likethe USA, where inventory is continually pushed into the supply chain by supplierdeals, which in turn lead to forward buying by customers.There is considerable interest in ECR in Australia, with 61 per cent of respondentsbeing aware of ECR and 40 per cent of respondents actively pursuing an ECRstrategy (Table I). Despite this interest in ECR, we believe that there is no realcommitment to its implementation. This is borne out by the fact that while 40 percent of respondents are actively pursuing an ECR strategy (Table I) only 17 per cent(EDI) and 4 per cent (ABC) respectively of respondents are actually committed tothe implementation of the essential business activities (Figure 2) necessary for thesuccessful implementation of ECR.A review of the Australian grocery industry (Commercial Economic AdvisoryService of Australia, 1991) identified inefficiencies within the Australian groceryindustry which ECR seeks to address. This review identified threats from alternative

store formats which were likely to have an adverse effect on the traditional grocerystore, the supermarket. Given the findings of this review, we find it somewhatsurprising that respondents to our survey did not indicate threats from alternative storeformats as a main reason for adopting ECR, and that there is not a stronger commitmentto implement the necessary ECR business activities/initiatives.

One of the main reasons given for adopting ECR is pressure from trading partners(Table II). These results, which differ significantly from the (comparatively limited)evidence available from the USA, suggest that the Australian motive for engaging inECR may well be quite different. Indeed, the likelihood is that Australian groceryindustry members appear to be "encouraged" to engage in ECR by large and powerfulcustomers (supermarkets) - a situation which is reminiscent of the Australianexperience with EDI. There is thus a real danger that, as with EDI, organisations maybecome involved only to the extent required by their larger and more powerful tradingpartners, so that the full benefits of a strategic approach may be lost.

The survey reported in this paper provides the first "hard" evidence of Australian ECRactivities and attitudes. One thing which has become clear from the results is that, aswith all surveys (which provide a "snapshot" of a respondent group at a point in time)we have made some fascinating discoveries, but opened up some even more intriguingpossibilities which the data cannot answer satisfactorily. The next step is clearly toengage in case studies of Australian and overseas organisations involved in ECR todiscover whether our suspicions about the motivations for ECR involvement arecorrect. This project is being undertaken by another member of the Monash ElectronicCommerce Research Group and our serendipitous discovery that the member nations ofthe European Union have nominated ECR as a major area of interest for the next fewyears encourages us to hope for an enthusiastic response from prospective case studyparticipants.




Figure 1 Inefficient business practices within the Australian grocery industry

Figure 2 ECR-related business activities within the Australian grocery industry

Table I Respondents' ECR status

Table II Reasons for actively pursuing an ECR strategy

Figure 3 Opinions as to the likely benefits of ECR in Australia

ReferencesAnderson, B., 1996, The Art and Science of Computer Assisted Ordering: Methods forManagement, Quorum Books, Westport, CT.Brawn, D., 1989, EDI Developments Abroad and How They Impact Australia, IDCConference, "EDI - The key to Profitability in the 1990s, IDC Conferences", Sydney.




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Thayer, W., 1991, "Computer-aided ordering is ready ... should you care?",Progressive Grocer, 70, 3, 81-6.Washburn, T., 1995, "Create win-win-win promotions", The Nielsen SolutionPartnership, 8-9.Weinstein, S., 1995, "On the cutting edge", Progressive Grocer, 74, 8, 34-40.Wheatley, M., 1996, "IT drives the chain", Management Today, 102-4.White, M., Wiland, E., Craig, E., 1995, The Food Week Industry Yearbook andDirectory of Suppliers, 1995, Ian Huntley Pty Ltd, Sydney.Wood, P.K., 1996, "Preparing for ECR at the store level", Chain Store Age, 72, 5,230.

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kurt salmon associates

nominate alternate economies

reverse crate flows

efficient unit load

retail world pty

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efficient unit loads

abs economic indictaors