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Table of Contents Executive Summary
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The UK distribution industry currently finds
itself in a period of considerable change. On the one hand, a relatively strong
economic environment in the UK continues to provide a sound basis for industry
growth. On the other, the distribution market is undergoing a series of
structural changes which mean that, for the majority of industry participants,
margins and profits remain extremely competitive. Furthermore, this situation
seems unlikely to change in the foreseeable future.
The distribution
market in 1996 is characterised by a much higher level of sophistication than
previously. Both customers and transport providers have radically changed over
the past 20 years, and have managed to transform the way goods travel through
the supply chain. Firms now look on the distribution function as an integral
part of their business. The rise in popularity of supply chain management, or
logistics as it has become known, requires greater co-operation between
distribution companies and their customers. At the same time, customers are
demanding higher levels and a wider range of service from their operator. This
is manifested in an increasing number of distribution companies offering
`value-added' services such as packaging and labelling.
The
development of supply chain management techniques has been given further
impetus by the greater level of competitiveness in the business environment.
Time compression, longer and more complex supply chains, product proliferation
and a systematic downward pressure on costs have all put pressure on the
distribution industry to improve performance. Production methods such as
`just-in-time' (JIT) have been widely introduced in order to secure the twin
objectives of improved service at lower cost. These are based on a demand-led
process of production and distribution, rather than the supply-led techniques
of the past.
At the retail end of the supply chain, growing
concentration and more intense competition has focused retailer attention on
extending control over and improving the supply chain. The result has been a
move towards lower inventory and fewer stockholding points. Retailers' greater
control has meant that relationships with suppliers have become very close.
The increasing complexity of the distribution function has prompted the
growth of specialist distribution companies. These are taking an increasing
share of the market from the `own-account' operators (i.e. those companies
which operate their own vehicles), as companies look to outsource
responsibility for their distribution function. This trend is expected to
continue.
Another key development in the distribution industry has been
the growth of the `integrated carriers'. These companies, of which the largest
are DHL, Federal Express, TNT and UPS, provide international transit services,
and have grown out of the requirement for the timely delivery of consignments,
irrespective of the mode of transport used. These carriers offer a range of
services, most frequently defined according to speed of carriage. The
development of the integrated carriers have encroached increasingly on the role
traditionally occupied by freight forwarders. As a result, forwarders have been
obliged to expand the range of services which they offer.
The
distribution market in the UK is dominated by road transport. Alternative modes
of transport such as rail and inland waterway have experienced a steadily
falling share of a rapidly growing market. Much of the reason for this lies in
the range of competitive advantages which road transport has over its rivals.
Firstly, it can offer faster door-to-door transit times, with greater frequency
of delivery and flexibility. Secondly, it is usually cheaper. In these
circumstances, rail has tended to concentrate on the movement of bulk
commodities, water has been used for petroleum products and air transport has
been limited to high-cost items or those which are particularly
time-sensitive.
The increase in demand for road transport has been met
primarily by an increase in truck size and performance, and an intensification
of fleet use, rather than a higher number of trucks. As a result, today's
greatly expanded volumes are handled by similar vehicle numbers to 10 years
ago. However, it is worth noting that for the majority of customers, the mode
of transport used is not of primary importance. Their concern is that goods are
delivered as cheaply and efficiently as possible, whichever mode is used.
A further major development which has affected the structure of the
distribution industry is deregulation. The road transport industry, in
particular, has undergone substantial deregulation over the last 10 years --
barriers to market access and constraints on capacity have been virtually
abolished -- and has significantly strengthened its competitive position,
encouraging the trend to the outsourcing of distribution services. By contrast,
the rail industry has suffered from regulation and inflexibility. It is also
significant that the regulatory framework in which business in general, and
distribution in particular operates, is increasingly set by the European Union
(EU). The EU is behind many initiatives, such as the deregulation of road
haulage, but also including the harmonisation of technical standards and the
setting of environmental targets, which affect the way distribution is carried
out.
The progressive development of the Single European Market (SEM)
within the context of an enlarged EU has meant that businesses are increasingly
organising themselves on a pan-European basis. This factor is also powerfully
affecting the development of the distribution industry.
The control of
information flows has become essential to the distribution industry. The advent
of affordable information technology has revolutionised the industry by
increasing the quality of information between different component parts of the
supply chain. This has had a considerable effect on costs, both directly by
reducing delays and the need for unnecessary handling, and indirectly by
enabling the precise co-ordination of goods flows, facilitating the reduction
of inventory.
Two particularly important examples of technological
advances are the electronic data interchange (EDI) and tracking and tracing
technologies. EDI allows intensive information sharing between supply chain
members by formatting and packaging information in a standardised form. New
tracking and tracing technologies allow for more accurate identification of
cargo, vehicle, driver and their location.
An implication of the
current highly-competitive state of the distribution market in the UK is that
industrial concentration will increase. The trends towards more sophisticated
service provision, pan-European coverage and a greater importance of IT all
mitigate in favour of larger organisation being more successful. Hays' bid for
Christian Salvesen (albeit rejected) and P&O's joint venture in its
container shipping operations with Nedlloyd both demonstrate that economies of
scale are becoming more important in the transport market.
One of the
most pressing issues facing the distribution industry at the moment is the
growing impact of environmentalism. Environmental concerns such as pollution,
congestion and noise are becoming ever more apparent and public opposition is
growing. Improvements in the road infrastructure are unlikely to keep pace with
traffic growth due to opposition to continued strategic road building. As a
result, the problems of congestion will get increasingly worse. This offers
significant opportunities for both the railway and inland waterway industries.
In particular, a growing number of commentators are suggesting that
environmental factors will prompt a resurgence in the fortunes of rail freight.
In this context, the opening of the Channel Tunnel has significantly improved
the competitive strength of rail by making longer journeys possible.
The growing importance of environmental issues could have a serious impact
on the distribution industry. The current UK Government has so far avoided
imposing drastic fiscal or legislative changes on the road haulage sector.
Whether such a laissez-faire attitude will pertain as congestion worsens, or
under a possible future Labour Government, is questionable. Measures such as
road charging, energy taxes and access restrictions (including curbs on urban
delivery by large lorries) are increasingly becoming part of the public
transport debate.
Text © 1996 Key Note
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