Executive Briefings

Long Supply Chain Creates Challenge for Duty-free Giant

The high-end duty-free shops owned and operated by DFS Group faced supply chain challenges around the movement of both goods and information. In the role of lead logistics provider, Pacer International helped DFS find solutions to each.

Global travelers with time and money to spend often make their way to the duty-free shops located at major international airports and in select destination cities around the world. There, shoppers can browse and buy a wide array of luxury goods and as long as they take these goods with them when leaving the country, they pay no taxes or duties.

With annual revenue in excess of $2bn, the world's largest duty-free retailer is DFS (Duty Free Shoppers) Group, headquartered in Hong Kong. DFS has around 150 stores in 14 countries. While these primarily are located in Asia/Pacific, there also are stores in Abu Dhabi and in the U.S., at San Francisco, Los Angeles and New York. In addition, DFS operates shops, called Gallerias, in various city centers and upscale resorts. The company is rapidly growing its Galleria network, most recently with a new store in Macao, China.

DFS airport stores and Gallerias offer upscale brands of cosmetics and perfume, jewelry, leather goods, liquor, tobacco, apparel, and other luxury items. Most of the brands it carries are based in Europe or North America and goods generally are sourced from these countries. A quick look at a map shows the challenge this presents for DFS.

"Sixty percent of our goods come from prestigious brands in Europe, which is halfway around the planet from most of our stores in Asia," says John Rutherford, vice president-global transportation, at DFS. In addition to having to cover long distances, most of DFS's products are high-value and are shipped in relatively small quantities, he says.

"We have many, many small shipments. It is very difficult for DFS to go to one supplier and pick up an entire trailer-load or an entire container-load at one location. Everything has to be consolidated and, since our locations are far-flung, shipments may need to be deconsolidated and reconsolidated several times before reaching destination. Another complexity is that many of our goods are high-fashion as well as high-value and so are very time-sensitive."

Fragmented efforts to meet these challenges had resulted in a "disjointed distribution model," Rutherford says. "Every time we set up a new geographical location, we would set up a complete distribution structure in that location to ensure that we would have inventory close to our stores, which was not very efficient."

To improve distribution efficiency and achieve other goals-including lower logistics costs, faster cycle times and better inventory management-DFS turned to its long-time logistics partner Pacer International, Concord, Calif.

"We partnered with Pacer for this project because the company had done a stellar job handling our U.S. transportation," says Rutherford.

DFS charged Pacer with developing a robust global supply chain infrastructure that addressed the movement of both goods and information. After conducting a thorough analysis, Pacer made several recommendations. Key among them was a suggestion to consolidate and streamline DFS's fragmented distribution network.

"Because of the way we were set up, we had many shipments coming out of our source locations that were moving independently with little or no consolidation," says Rutherford. "Pacer helped us realize that that we could be much more efficient if we consolidated and concentrated inventory into fewer locations. By establishing a few consolidated hubs, we could begin to collapse cycle times and have goods available to our sales locations on very short notice. Today, from our consolidated forward hubs we can put goods virtually anyplace on the planet within 24 to 48 hours," he says. These hubs are located in Basel, Switzerland; Torrance, Calif.; Hong Kong; and Singapore.

Another large part of Pacer's recommendations involved information and data management. "Pacer determined that enhancing transactional data management would systematically improve overall performance at every step, from supplier to store," says Rutherford. A crucial step was establishment of a global control center that enables vendors to easily enter purchase-order data and pickup requirements. This information is linked to Pacer's transportation management system, which is used to plan and execute vendor pickups and freight consolidations.

"When the orders come into the Pacer system, we arrange transportation with our carriers and let the vendor know when to expect a truck," says Larry Savage, president of Pacer's highway and supply chain services group. He explains that Pacer operates as a lead logistics provider or 4PL in its relationship with DFS, overseeing carrier and service providers that include customs brokers, freight forwarders and transportation companies. To further improve efficiency of the pickup process, Pacer also established regular "bus" runs, assigning service to specific suppliers and locations on set days of the week. "We get much greater pickup efficiency this way," he says.

These changes helped DFS achieve faster order cycle times, which is a very important factor for many of the fashion-forward, time-sensitive brands that it sells. "Getting goods there at the right time is always important for retail, but it is even more so for us because we typically get only one opportunity to see a customer during a season," says Rutherford. "Shoppers are in our store once for an hour or so and that's it."

Rutherford also notes that many of the high-end brands that DFS sells often use DFS stores to introduce new products because the stores attract such a high concentration of their target customers. "This is another reason that we put so much emphasis on order-cycle time, which we define as the time between when a product is available for pickup from a vendor to when it is available for sale to a consumer."

Another step DFS took to improve cycle time was to move more freight from ocean transport to air, a shift that also was driven by the high value of DFS's luxury products and the small size of most shipments. "Currently, 75 percent to 80 percent of our products move by air," says Rutherford. "It just doesn't make sense to have goods of that value spend a lot of time in transit."

Not only did Pacer facilitate the shift from sea to air, "they also did a great job of collapsing handling and processing times for airfreight shipments," says Rutherford. "With all these efforts, we have reduced our cycle time from weeks to days."

The shift to airfreight presented another information challenge, however. "When using airfreight, the speed of information flow really becomes critical," Rutherford says. "One of the big issues we encountered was a tendency for the goods to get to location before the information did." When that happens, customs clearance is delayed. "At one point before these changes, up to 30 percent of our shipments were being delayed by 5 to 14 days because of missing documents or missing information, so that became a prime challenge for us."

To address this issue, Pacer designed a document information management system. "In many cases, we now have much of the information we need six hours before wheels up," says Rutherford. "This means we can start pre-clearance processes before the merchandise even moves." Rutherford also notes that Pacer's cross-border process is C-TPAT certified "and has been for several years."

Pacer's document management solution is a good example of how the logistics company approaches problems, says Rutherford. "When we look at a problem with them, we start by defining the outcome we want. For example, in this case, we wanted to have the information there before the merchandise. Then we ask, what does the current process deliver against this goal? Together, we analyze the short-fall and its causes and we develop strategies to address it and tactics to deploy. At the end of the day, we go back and measure to make sure we have resolved the problem or reached the new goal.

"This is a very straightforward way to get to the heart of issues-looking at what we are doing vs. what we need to do and seeing what the benefit would be if we changed," he says. "It is a very classic cost-benefit analysis and problem-solving approach."

It also delivers a result that really fits the individual business, Rutherford adds. "Pacer has the same tools that anyone else would have in their toolbox, but they apply them in what I call a boutique approach. They have been very successful in optimizing both their resources and ours against our needs around time to market and cost to market."

Rutherford cites the following specific results:

• A year-over-year decrease in freight expenses of 17 percent, despite a 5-percent increase in air cargo shipments. Savings were largely to due to load optimization.

• Inventory dwell times reduced by as much as 75 percent. This reduction is attributed to proactive information management that increased document accuracy and to handling efficiency at DFS distribution centers.

• Shipping claims down to .002 percent. With better information and more secure processes, freight claims hit an all-time low and most are resolved within 90 days, virtually eliminating losses that had plagued the replenishment process.

• Bill and freight payment accuracy of 99.99 percent. Freight bill audit and processing now has less than one error per thousand, ensuring a smooth flow of payments to the carriers that Pacer manages on behalf of DFS.

"Working with Pacer allows DFS Group to focus on what we do best-merchandising and retailing-and enables us to expand our business with the confidence of a smooth supply chain," Rutherford says.

RESOURCE LINKS:
DFS Group, www.dfsgroup.com
Pacer International, www.pacer.com

Global travelers with time and money to spend often make their way to the duty-free shops located at major international airports and in select destination cities around the world. There, shoppers can browse and buy a wide array of luxury goods and as long as they take these goods with them when leaving the country, they pay no taxes or duties.

With annual revenue in excess of $2bn, the world's largest duty-free retailer is DFS (Duty Free Shoppers) Group, headquartered in Hong Kong. DFS has around 150 stores in 14 countries. While these primarily are located in Asia/Pacific, there also are stores in Abu Dhabi and in the U.S., at San Francisco, Los Angeles and New York. In addition, DFS operates shops, called Gallerias, in various city centers and upscale resorts. The company is rapidly growing its Galleria network, most recently with a new store in Macao, China.

DFS airport stores and Gallerias offer upscale brands of cosmetics and perfume, jewelry, leather goods, liquor, tobacco, apparel, and other luxury items. Most of the brands it carries are based in Europe or North America and goods generally are sourced from these countries. A quick look at a map shows the challenge this presents for DFS.

"Sixty percent of our goods come from prestigious brands in Europe, which is halfway around the planet from most of our stores in Asia," says John Rutherford, vice president-global transportation, at DFS. In addition to having to cover long distances, most of DFS's products are high-value and are shipped in relatively small quantities, he says.

"We have many, many small shipments. It is very difficult for DFS to go to one supplier and pick up an entire trailer-load or an entire container-load at one location. Everything has to be consolidated and, since our locations are far-flung, shipments may need to be deconsolidated and reconsolidated several times before reaching destination. Another complexity is that many of our goods are high-fashion as well as high-value and so are very time-sensitive."

Fragmented efforts to meet these challenges had resulted in a "disjointed distribution model," Rutherford says. "Every time we set up a new geographical location, we would set up a complete distribution structure in that location to ensure that we would have inventory close to our stores, which was not very efficient."

To improve distribution efficiency and achieve other goals-including lower logistics costs, faster cycle times and better inventory management-DFS turned to its long-time logistics partner Pacer International, Concord, Calif.

"We partnered with Pacer for this project because the company had done a stellar job handling our U.S. transportation," says Rutherford.

DFS charged Pacer with developing a robust global supply chain infrastructure that addressed the movement of both goods and information. After conducting a thorough analysis, Pacer made several recommendations. Key among them was a suggestion to consolidate and streamline DFS's fragmented distribution network.

"Because of the way we were set up, we had many shipments coming out of our source locations that were moving independently with little or no consolidation," says Rutherford. "Pacer helped us realize that that we could be much more efficient if we consolidated and concentrated inventory into fewer locations. By establishing a few consolidated hubs, we could begin to collapse cycle times and have goods available to our sales locations on very short notice. Today, from our consolidated forward hubs we can put goods virtually anyplace on the planet within 24 to 48 hours," he says. These hubs are located in Basel, Switzerland; Torrance, Calif.; Hong Kong; and Singapore.

Another large part of Pacer's recommendations involved information and data management. "Pacer determined that enhancing transactional data management would systematically improve overall performance at every step, from supplier to store," says Rutherford. A crucial step was establishment of a global control center that enables vendors to easily enter purchase-order data and pickup requirements. This information is linked to Pacer's transportation management system, which is used to plan and execute vendor pickups and freight consolidations.

"When the orders come into the Pacer system, we arrange transportation with our carriers and let the vendor know when to expect a truck," says Larry Savage, president of Pacer's highway and supply chain services group. He explains that Pacer operates as a lead logistics provider or 4PL in its relationship with DFS, overseeing carrier and service providers that include customs brokers, freight forwarders and transportation companies. To further improve efficiency of the pickup process, Pacer also established regular "bus" runs, assigning service to specific suppliers and locations on set days of the week. "We get much greater pickup efficiency this way," he says.

These changes helped DFS achieve faster order cycle times, which is a very important factor for many of the fashion-forward, time-sensitive brands that it sells. "Getting goods there at the right time is always important for retail, but it is even more so for us because we typically get only one opportunity to see a customer during a season," says Rutherford. "Shoppers are in our store once for an hour or so and that's it."

Rutherford also notes that many of the high-end brands that DFS sells often use DFS stores to introduce new products because the stores attract such a high concentration of their target customers. "This is another reason that we put so much emphasis on order-cycle time, which we define as the time between when a product is available for pickup from a vendor to when it is available for sale to a consumer."

Another step DFS took to improve cycle time was to move more freight from ocean transport to air, a shift that also was driven by the high value of DFS's luxury products and the small size of most shipments. "Currently, 75 percent to 80 percent of our products move by air," says Rutherford. "It just doesn't make sense to have goods of that value spend a lot of time in transit."

Not only did Pacer facilitate the shift from sea to air, "they also did a great job of collapsing handling and processing times for airfreight shipments," says Rutherford. "With all these efforts, we have reduced our cycle time from weeks to days."

The shift to airfreight presented another information challenge, however. "When using airfreight, the speed of information flow really becomes critical," Rutherford says. "One of the big issues we encountered was a tendency for the goods to get to location before the information did." When that happens, customs clearance is delayed. "At one point before these changes, up to 30 percent of our shipments were being delayed by 5 to 14 days because of missing documents or missing information, so that became a prime challenge for us."

To address this issue, Pacer designed a document information management system. "In many cases, we now have much of the information we need six hours before wheels up," says Rutherford. "This means we can start pre-clearance processes before the merchandise even moves." Rutherford also notes that Pacer's cross-border process is C-TPAT certified "and has been for several years."

Pacer's document management solution is a good example of how the logistics company approaches problems, says Rutherford. "When we look at a problem with them, we start by defining the outcome we want. For example, in this case, we wanted to have the information there before the merchandise. Then we ask, what does the current process deliver against this goal? Together, we analyze the short-fall and its causes and we develop strategies to address it and tactics to deploy. At the end of the day, we go back and measure to make sure we have resolved the problem or reached the new goal.

"This is a very straightforward way to get to the heart of issues-looking at what we are doing vs. what we need to do and seeing what the benefit would be if we changed," he says. "It is a very classic cost-benefit analysis and problem-solving approach."

It also delivers a result that really fits the individual business, Rutherford adds. "Pacer has the same tools that anyone else would have in their toolbox, but they apply them in what I call a boutique approach. They have been very successful in optimizing both their resources and ours against our needs around time to market and cost to market."

Rutherford cites the following specific results:

• A year-over-year decrease in freight expenses of 17 percent, despite a 5-percent increase in air cargo shipments. Savings were largely to due to load optimization.

• Inventory dwell times reduced by as much as 75 percent. This reduction is attributed to proactive information management that increased document accuracy and to handling efficiency at DFS distribution centers.

• Shipping claims down to .002 percent. With better information and more secure processes, freight claims hit an all-time low and most are resolved within 90 days, virtually eliminating losses that had plagued the replenishment process.

• Bill and freight payment accuracy of 99.99 percent. Freight bill audit and processing now has less than one error per thousand, ensuring a smooth flow of payments to the carriers that Pacer manages on behalf of DFS.

"Working with Pacer allows DFS Group to focus on what we do best-merchandising and retailing-and enables us to expand our business with the confidence of a smooth supply chain," Rutherford says.

RESOURCE LINKS:
DFS Group, www.dfsgroup.com
Pacer International, www.pacer.com