Woolworths Plc

Sourcing Retail Merchandise from South East Asia

David Taylor & Brian Shortland

Case No. 0152

 Copyright 2001 - David Taylor.

This material is for the personal use of the individual purchaser or for reproducing on the
specified course only.

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Woolworths Plc
Modal Choice Decisions in International Transport
By David Taylor & Brian Shortland

Introduction

In October 1993, Brian Shortland of Woolworths plc was considering the results of a 12 month
project in which he had reviewed the supply chain systems operated by the company for
sourcing merchandise from South East Asia. It was clear that a major overhaul of the
company’s operation was required and he was contemplating how best to present the results
of his review and his recommendations for improvements to the next Woolworths’ Board
Meeting which would be held in ten weeks time.

Company Background

Woolworths plc is a major retailer in Britain with some 800 outlets in the UK. The first store
was opened in Liverpool England in 1909 by the F.W. Woolworth organisation of the United
States of America. The company under the F.W.W title was, by 1980, operating from 795
stores in all the major cities and towns in Britain. However in 1982 the UK operation was
bought from the American parent company by Kingfisher, a British consortium.

The main focus of the company is directed at young families with children. Five main product
ranges are carried in store, which are: - Toys; Children’s Clothing; Entertainment (compact
discs, tapes, videos); Confectionery; and Home & Kitchen. Merchandise is priced in the low to
medium range thus supporting the main customer base and within the United Kingdom.
Woolworths has a strong position in the market place as is shown in Exhibit One.

Exhibit One
Woolworths Market Position within the UK by Value of Sales 1993

TOYS 2nd place

CHILDREN’S CLOTHING 2nd place

ENTERTAINMENT 1st place

CONFECTIONERY 1st place

HOME & KITCHEN N/A

In 1993, some 33% of the merchandise sold, approximately £500,000,000 (Sterling) at selling
price, was manufactured in Asia of which approximately £330,000,000 was purchased from
UK importers and £170,000,000 was purchased direct from the Far East. This volume of
merchandise entailed shipping some 3,500 TEU’s (twenty foot equivalent container units),
which made the company the largest importer by volume in the UK retail trade.

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The Importing Process

Wooworths operated a Shipping Department, based at the London headquarters, to handle

the order processing, customs clearance and payment for merchandise imported directly from
overseas suppliers. Most merchandise was bought on C&F (Cost and Freight) terms from
suppliers. Payment was in the main on the basis of ‘Documents against Payment at sight’
(D/P), with some Letters of Credit’s opened when certain suppliers insisted. (See Appendix
One for details of terms of trade)

There was very little co-ordination between the company’s 25 merchandise buyers and the
shipping department. Furthermore the buyers each independently arranged their own currency
requirements from the company’s central finance department in London, but there was no
central control or reconciliation of the large number of currency contracts placed.

Exhibit Two

Structure of the Shipping Department

Shipping Manager

|
Assistant Customs Senior Payments Accounts Purchase
Manager Clearance Clerk Clerk Order Clerk
Clerk
| | | |

Airfreight 2 Assistants 2 Assistants 1 Assistant

Clerk

The shipping department was struggling to keep control of the situation and a number of
problems were causing concern to senior management. The department was handling some
6000 sets of shipping/bank documents per annum and preparing the same number of HMC&E
(Her Majesty’s Customs and Excise) declarations in order to clear goods for importing. The
staff were knowledgeable and keen but had no authority to change company policy on
importing nor to challenge the Buying function on the methods and practices they used.
The documentation procedure in place at this time was as follows: -

When buyers returned from their Far East sourcing trips, handwritten purchase orders were
passed from the buying departments to the Shipping Department. This was because
merchandise was purchased in various currencies and no systems within the organization
could handle currencies other than Sterling, so import purchase orders could not be produced
via the company’s computerised purchase order management system.

Once received by the Shipping Department purchase orders were checked as to:

- Latest shipment date

- Payment terms
- Correct country of origin
- Correct currency
- Supplier details
- Customs tariff classification

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When checking and verification were complete, the import purchase order with shipping
instructions would be mailed to the supplier. Where payment terms were by Letter of Credit,
the application form would be completed manually and submitted to the company’s bank in
London. The bank would then issue the Letter of Credit to the supplier.

Once merchandise had been shipped from the port of export and bills of lading issued by the
shipping company, the supplier would complete the various export documents. They would
present the originals to their bank for onward transmission to Woolworths’ bankers in the UK
and at the same time send copy documents to the Woolworths Shipping Department.

Documents were received by Woolworths in London from their bank (on trust for 24 hours).
These were then checked against the import purchase order and, if satisfactory, the bank was
advised to pay the relevant Bill of Exchange if payment terms were D/P, or to accept the Bill of
Exchange if terms were D/A. (see Appendix One for explanation). It is important to note that
until the shipping documents were released to the importer by the bank, the importer had no
‘Title’ to the goods.

Declarations to HMC&E were then manually completed, which entailed copying all the relevant
details of the consignment onto an official HMC&E “Customs Declaration” set of forms. The
information required by HMC&E for each consignment of imported merchandise was:

• Name of vessel
• Arrival date at UK port
• Name of UK port
• Description of goods
• HMC&E tariff
• Quantity of goods (numeric)
• Quantity of goods (weight)
• Value of goods in currency of invoice
• Value of goods in sterling (conversion rate is set each period by HMC&E)
• Cost of freight
• Duty payable (duty is payable on “Landed Cost” i.e. cost of goods + ocean freight +
insurance).
• Country of origin
• Insurance cost

The HMC&E declaration was then sent to Woolworths’ customs clearing agents at the port of
import. They would present the declarations with invoices, packing lists and GSP Certificate of
Origin, for the goods to be cleared for import. This process took between five days and two
weeks.

Once the goods were cleared by customs, merchandise would then be booked by the clearing
agents for delivery from the port of import to the relevant Woolworths distribution centre (DC)
in the UK. The company had two distribution centres, one in Swindon to serve the south and
the other in Rochdale to serve the north of the country. Upon receipt at the DC, merchandise
would be checked for quality against the standards set by the Woolworths Quality Assurance
Department. If acceptable, it would be issued to stores; if not, it would be held for return to the
supplier.

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The Operation of the Buying Department

The company had three main merchandise divisions (Toys; Home Essentials and Kidswear)
which all imported on a direct basis. Each division had a divisional director and a number of
buying teams, which specialised in various lines within the product range for the division (see
Exhibit Three). The main processes in the company’s buying cycle are shown in Exhibit Four.

Exhibit Three

Typical Divisional Buying Structure:

Director
(Kidswear)
|
Buyer Buyer Buyer
Toys Age 0-12 months Toys Age 1-3 years Toys Age 3-10 years

| | |
Assistant Buyer Assistant Buyer Assistant Buyer
| | |
Merchandiser Merchandiser Merchandiser

Exhibit Four

The Buying Cycle

Range Sourcing of Selection of Samples Buying Purchase Order

Planning potential preferred received from Decision Placed
suppliers suppliers suppliers

(2) (3) (4) (5) (6)

(Step 1)

Goods ready Goods on Vessel Vessel Arrives Documents HMC&E

for shipment Board Vessel Departs Port of UK Port Received Declaration
from Export from Bank completed by
supplier Woolworths UK

(8) (10) (11) (12)

(7) (9)

HMC&E Goods Bill of Lading Goods Booked

Declaration Cleared for presented to into
Presented to Import Shipping line Woolworths
Customs for Release of Distribution
Goods Centre

(13) (14) (15) (16)

The buying cycle lead times varied for each division:

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a) Children’s Clothing would typically be:

Buyers visit Far East - October/November

Orders Placed - January

Delivery in UK - August / September

b) Toys would typically be:

Buyers visit Far East - September / October

Orders Placed - January

Delivery in UK - May / June (for July sales promotion)

Woolworths, like many other retailers considered efficient purchasing to be at the heart of
successful retailing. As a consequence, the Buying function was a particularly influential
department within the company and was responsible for all purchasing activities from range
planning and demand forecasting, through to placing the purchase orders and the
specification of product volumes and delivery schedules. As one of the main elements in
Woolworths’ market position was price competitiveness, a key objective for the buyers was to
minimise unit purchase price and as a consequence, the primary measure used to evaluate
the effectiveness of buying was the gross margin. This was the estimated selling price of the
product minus its landed cost at the ‘back door’ of the UK distribution centre (the latter being
the price quoted by suppliers on a C+F basis).

On the whole, the buyers were very successful at meeting the gross margin objective because
of their experience and expertise in negotiating and because the volumes required meant they
usually had considerable purchasing power with suppliers. They would also order bulk
quantities in order to receive further discounts and achieve economies in transportation costs.
Most buyers had considerable experience in the business and had progressed to positions in
buying through either the retailing or merchandising functions of the company. Buyers would
pride themselves on their knowledge of the market and would be confident in their judgments
about what would or would not sell and of the quantities that would be required for a particular
season or period.

Buyers often made decisions on product selections, required quantities and approximate
selling price on the basis of their ‘feel for the market’. In practice, this required considerable
skill but did entail some risk, particularly as Woolworths did not have an EPOS system in
place in the stores and therefore had little in the way of computerised data on past sales from
which to forecast demand. A further factor adding risk in purchasing was the fact that many of
Woolworths products were either fashion items such as toys and clothing, or highly seasonal
items such as garden furniture, the demand for which was notoriously difficult to predict. Such
risks were exacerbated when merchandise was sourced from distant suppliers because of
long and variable lead times of supply, fluctuations in currency values and the requirement to
predict volumes, place orders and purchase often a whole season’s requirements in one
order, usually well in advance of the selling period. The normal pattern in purchasing from SE
Asia was to order the total quantity required for a season and for goods to be shipped in one
bulk delivery or occasionally in phased shipments.

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Identifying Problems

As part of his investigation, Shortland held discussions with the following groups within the
company, each of which had an involvement in the supply chain: -

a) Buyers
b) Merchandisers
c) Shipping Department
d) Finance Department
e) Distribution Management

From these meetings a number of problem areas were highlighted by the managers within the
respective sections

Buyers

The buyers felt that one of the main problems lay with long lead times, particularly at the UK
end of the supply chain. There was considerable uncertainty over the length of time taken
between arrival of merchandise at the UK port and eventual clearance and delivery to the
distribution centres. In practice this could vary between a few days and a few weeks and often
resulted from delays due to documentation problems or customs procedures. Average port
clearance time was about 2 to 2.5 weeks. In consequence buyers often added extra weeks
to lead times to cover these periods. Of course this meant that those shipments which did
clear the ports efficiently (e.g. in a few days) arrived at the distribution centres ahead of
schedule and had to be stored for longer before distribution to the shops.

Buyers also expressed concern over the quality control system. In 1993 there was some £3.5
million owed to the company by major suppliers for faulty merchandise supplied over the
previous 12 month's period.

The quality control system worked as follows:

Once a buyer had sourced a potential item, the supplier would be required to send samples
for testing to the Quality Assurance Department at headquarters in London. For many items
this testing would be extremely rigorous, particularly for children’s toys, for which European
Community safety standards were very stringent. If the product met the required standards, it
would be approved and an order confirmed. Staff from the London QA department would also
visit the Far East on a number of occasions each year to inspect the factories of suppliers.
Once a factory was accepted an agreed quality monitoring system was put into place
supervised by an external agency specialising in quality assurance management. However
quite frequently suppliers would despatch shipments before the Q/A agency had inspected the
goods.

When products were delivered to the UK distribution centres, a rigorous, random sampling
procedure was carried out and if the samples taken failed to meet the required standards, the
whole shipment would be rejected. It was not at all uncommon to find that the quality of
delivered products was below that of the samples originally sent to HQ either in terms of
materials used or quality of workmanship. Resulting disputes with suppliers were often
difficult to resolve and the only real lever Woolworths had was to withhold payment, either
against the current shipment, if payment had not been made, or against future orders, e.g.

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when a letter of credit was involved.

Merchandisers

The role of merchandisers was to provide an interface between the buyers, the UK distribution
centres and the administrative departments including the shipping department. Whilst the role
of the shipping department was to organise the documentation and customs clearance of
imported goods and arrange for delivery from the port to the appropriate DC, the
merchandisers administered the disposition of goods. This involved allocating stock to the
appropriate DC, informing DC’s as to when to expect deliveries from suppliers and
determining delivery volumes and schedules from the DC’s to the stores. Merchandisers often
worked in partnership with an individual buyer and would check that when a buyer placed an
order, there was sufficient quantity to give stock coverage for each store.

The main complaint of the merchandisers was the lack of control over merchandise shipment
programmes. Firstly there was no control over when merchandise was actually shipped,
which often led to merchandise being received late. Secondly as goods were normally
purchased on C&F terms, the vendors supplied the merchandise, arranged the shipping and
paid the freight, without any obligation to provide information about the vessel / shipping line
used, or the date of departure from the port of export. Thus once an order was placed very
little information was available until the shipping department received either the original
documents from the bank or copy documents from the supplier. These were often received
up to 5 weeks after merchandise was shipped from port of export by which time the goods had
quite frequently arrived at the UK port.

Shipping Department

The main problem here was that the department was working at full capacity to keep up with
the flow of documents and in particular to complete the HMC & E declarations. The workload
was such that there was a need to increase the number of staff employed.

Finance Department

The company’s finance managers considered there was a serious risk element within the
currency purchasing procedure. The finance department responded to the demands of the
buyers. Each buyer independently ordered foreign currency to suit their own purchasing
requirements and there was little overall control of the amounts purchased or the timing of
purchases. Thus substantial deposits of foreign currencies were held by the company with the
risk of losses being incurred if Sterling weakened.

Distribution Management

Managers of the company’s two DC’s voiced two main concerns: -.

Firstly they were unaware of merchandise on order, or of delivery schedules until they
received information from merchandisers about when goods were booked for receipt at the
DC’s. Often this was only a matter of weeks or even days before delivery, which meant
planning of manpower and other resources within the DC’s was difficult.

Secondly if the volumes of merchandise purchased proved to be in excess of the amount sold
in a particular season, the DC’s were left holding the excess stock, sometimes for a whole
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year, until the next selling period. This could create problems of congestion in the warehouses
and also added costs in excess of warehouse budgets. Warehouse managers resented these
costs as they felt they arose as a result of inefficiencies in the buying process rather than
from inefficiencies in the warehouse. Buyers were charged a fee for warehousing and
distribution which was offset against their gross margin calculation.

This distribution fee was calculated by allocating budgeted distribution costs on the basis of
the proportion of total throughput accounted for by each line, but it did not include the cost of
any long term stocking of over-ordered lines, nor the cost of collecting and re-warehousing
unsold stock from stores. Neither did it include any allowance for the cost of capital tied up in
inventory. The latter cost was considered as part of the company’s general overhead and was
another issue of concern frequently raised by the finance department. On average stock held
by the company was in the in the order of £250 - £300 million with the bulk held in stores,
either on display (approx. 50%) or in back-of-store stock rooms (approx. 40%) and the rest
held in the DC’s (approx. 10%).

The Need For Change

Although the company’s senior management did not have detailed knowledge of the day to
day operations of the Far East supply chain, they had recognised there were problems and
hence had appointed Shortland to review and improve the situation. Following his
investigations, Shortland had a much clearer picture of the various operational difficulties that
existed, however one area in which he had not found much information was in relation to the
costs of operating the supply chain system. This was partly because these costs were split
between various departments within Woolworths and also because a significant portion of the
logistics costs were hidden in the C+F prices quoted by the majority of suppliers. Although he
did not know the costs involved even in the delivery of product from suppliers into the DC’s,
his ‘gut feeling’ was that the delivery costs alone might account for anything up to 15% of the
C+F price. If this was the case, he was confident there was scope for considerable saving.

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APPENDIX ONE

GLOSSARY OF TERMS

TERM DESCRIPTION

Shipping Terms

TEU A count used in container shipping.

One TEU equals one twenty-foot container.

FEU One FEU equals one forty-foot container.

Buying Terms

C & F (Cost and Freight) The vendor quotes for supplying the merchandise, arranging
shipment and paying the freight costs to a specific destination.

C.I.F. (Cost Insurance and The vendor quotes for supplying the merchandise, arranging
Freight) shipment, insuring the cargo, and paying the freight costs to a
specific destination.

F.O.B. (Free on Board) The vendor quotes for supplying the merchandise and for all
landside costs up to loading the cargo on board the ship. The buyer
pays the freight costs.

Documents

B/L(Bill of Lading) When cargo is placed on board a vessel the B/L is given by the
shipping line to the owner of the cargo (The Shipper). This document
is issued as a set, comprising 3 originals, which are signed by the
shipping line or their agents, and 3 copies which are unsigned.
Possession of an original of this document gives TITLE to the cargo.
This document is also a receipt for the cargo.

Invoice The document giving details of the merchandise sold, with

description, price and quantity.

Packing Advice Document giving details of No. of cartons, carton no’s, marks and
measurements and weights.

GSP Certificate Document issued in the country of export to support a claim that the
merchandise is within the GSP (General System of Preferences)
enabling less or nil duty to be payable in the country of import.

Certificate of Origin Document issued in the exporting country stating the origin of the
goods.

Payment Terms

Letter of Credit (L/C) This method of payment gives safeguards to both the vendor and the
buyer. A Letter of Credit is issued by the buyer’s (Applicant’s) bank
(Issuing Bank) via the vendor’s bank (Advising Bank) to the Vendor
(Beneficiary). The L/C is a bank guarantee that the Issuing Bank will
make payment, or accept and pay Bills of Exchange drawn by the
Beneficiary, providing all documentation and conditions stated in the
L/C are met.

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Bill of Exchange A written obligation to pay at Sight or at some specific future date a
sum certain, to the Drawee.

Drawee The person or company requiring payment.

Acceptance The act of signing the Bill of Exchange accepting responsibility for
the debt. Once a bill is accepted there is no defence in law against
non-payment.

Acceptor The person or company acknowledging the debt.

Documents against Payment Documents granting Title to the goods will be handed to the Buyer
(D/P) upon payment of the Bill of Exchange.

Documents against Documents will be handed to the Buyer upon acceptance of the Bill
Acceptance (D/A) of Exchange for payment at some future specified date.

General Terms

H.M.C&E. Her Majesty’s Customs and Excise Department i.e. UK CUSTOMS

ICC International Chambers of Commerce

PEROD ENTRY

This is a concession allowed by HMC&E after auditing the importer’s computer software. It allows the
importer to make monthly returns to HMC&E of all imports made within the period.

LOCAL IMPORT

The local office (relative to the DC into which the ‘control’ merchandise will be delivered receives notice
of the contents and time and date of delivery. If HMC&E wish to inspect the cargo they will attend the
DC site at the time of arrival. If they do not appear the merchandise is deemed “cleared” for customs
purposes.

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