Pieter Heij (HEMA) on an Efficient Logistics Chain

The product range has been cleaned up and nowadays HEMA focuses ‘on good items that last longer. This is how we, together with our customers, help reduce the carbon footprint,’ as new CEO Saskia Egas Reparaz put it when presenting the new strategy in 2021. ‘In doing so, we are increasingly distancing ourselves from the disposable society. We continue to opt for products that are recognizable by their typical Dutch design, which are produced sustainably and that are affordable for everyone.’
This strategy brings challenges and decisions about current and future logistics. Because of the wide range of products and to be able to fulfil HEMA’s mission to use ‘products to make everyday life better and the everyday world a little more beautiful.’ Because of the widely differing distribution channels: an online channel, the store channel, the wholesale channel (to serve the Jumbo stores) and then some smaller channels such as the fresh channel (through which, for example, HEMA’s famous cakes are distributed from the bakeries to the stores). Because of the many peaks and troughs in demand in the short term. Because of the (possible) further shift in demand to online in the long term. Because of HEMA’s self-imposed demands for sustainability, financial return and social policy - to name just a few complicating factors.

How do you ensure that the logistics apparatus and the activities within it optimally meet all these different objectives?
‘We use scenario planning. We choose three or four scenarios based on different assumptions about the market, the store network, the assortment, customer propositions, competition and legislation. We consider which logistics solution best fits them and the costs and benefits of each option. Then we choose the logistics network that can, with some adjustments, best support the chosen scenario. We try to build in as much flexibility as possible, however difficult that may be. Because you cannot always be fast enough on your feet and react rapidly to what happens. For example, before you have established a new logistics location and mapped out all the conditions, you are two or three years down the road. After that however, we can set up the location relatively fast.
One of the most important dimensions is the uncertainty of the growth of the online market. It is no longer growing as fast as it was during the corona crisis. But in the meantime, revenue from online sales is 20 percent of our total sales anyway, and we think it will continue to grow. We are also looking at the number of new stores we expect to open - something that depends mainly on the availability of suitable locations and HEMA’s financial performance. A third area of focus is the number and type of products HEMA plans to carry. Currently there are 15,000 per season, but we are reducing that number and changes are also taking place within those products. So no longer 15 types of bath sponges in the assortment, but the best five. Smart preselection is what we call it. We look carefully at the development of the demand for products and product categories and the margin we make on them, and therefore the costs.
By now, when we open a new store somewhere, we know exactly what to expect. By studying the average income, population composition and other demographic factors, HEMA can predict very accurately what the performance of the new store will be: how much sales the new store is likely to generate, and from what products.’

And the costs, can they also be estimated accurately?
‘The costs can also be estimated accurately. Not only the labor costs and rental costs of the store, but also all the various logistics and other indirect costs. The estimation of these has become more accurate in recent years, as we are also gaining increasing insight into this estimation; we no longer look only at purchase prices but try to include the total logistics cost.
This is also why we strive to sell as many small, easily transportable products as possible. For example, we ensure that our successful ‘Takkies’ - a stuffed animal in the image of Jip and Janneke’s dog - are vacuum-packed so that they can be sent in a handy package. Products where this is not possible, such as garden chairs or TVs, are not likely to be found in our assortment. Neither are items that are complicated to package, although of course it may be that a particular item is so popular that we give in anyway. In Belgium, for example, we therefore sell dried flowers, which are very popular there. And, of course, we also sell other fragile products, such as Christmas ornaments and tableware, online. Fortunately, we can properly transport, store and distribute most of our products to customers. That is because we design all our non-food products ourselves, develop the specifications for the packaging, have the products manufactured and so can ensure uniform formats that are easy to store and transport. And also fit well in our outer packaging.’

Data are being used for strategic choices. How is the quality of that data assessed?
‘Data is important. But much more important is defining clear strategies and scenarios. That has far more impact. This certainly applies to choices about logistics issues. For that, you can rapidly have enough high-quality data. When it comes to customer data, it is perhaps a different story; it must be of excellent quality to be able to extract insights from it with your CRM system. And then you also need to monitor the quality very closely. But you can in very little time have enough logistical data. Maybe other retailers do not think that way - but that is my vision.’

What led to the choice of the current distribution centers?
‘That choice was also made based on those scenarios. Our two main distribution centers are in Utrecht, one for online sales and one for sales through the stores. We chose this division because the dynamics within the two channels are completely different. The stores have a stable and predictable demand, which we can serve with a fixed rhythm and capacity. Online sales have a much more erratic and unpredictable demand, which we have to serve with a variable rhythm and capacity. By separating those two channels, we can serve them both optimally, without interfering with each other.
The online distribution center was specifically designed with excess capacity for future growth. Now it turns out that that growth is not as large as we predicted during the corona crisis, but that is not a concern. The excess capacity can be used in a variety of ways. Currently we use the space for pallet storage, and not for mechanized distribution as originally intended. In the future, we may want to supply Jumbo stores with HEMA items from there. We have outsourced that now, but we would much rather do it ourselves.’

In the logistics chain, how do you decide what to do yourselves and what to outsource? As in this specific case, which involves supplying Jumbo stores. Why not keep outsourcing that?
‘The initial decision to work with Jumbo was made in 2019 under time pressure and a need to get results quickly. Outsourcing was seen as the quickest route. And rightly so, because we still need to overcome some obstacles before we can serve Jumbo ourselves from our distribution centers. For example, we have blue crates and Jumbo does not. Our outer packaging is different. And there are more similar differences. But our aim is to insource the outsourced activities. After all, all HEMA’s distribution centers in Utrecht are in proximity to each other. That makes it possible to distribute the labor pool evenly across all locations. The working hours of teams can be tailored to the specific requirements of each channel. Store teams, for example, who are tied to specific delivery times, can be utilized optimally. At the same time, the online team can work in the evening, and the Jumbo team can be deployed in the morning.
We do not go as far as making people work night shifts. Nobody enjoys that, it is bad for the health of our employees and thus conflicts with our aim of being a good employer. Most customers have no urgent need for the products HEMA offers, and do not mind if their order is delivered within two or three days. And if someone is in a huge hurry anyway, they can just go to a store. That, of course, is another advantage when you have an extensive network of physical stores: that it adds to customer choice. In addition, the major part of online orders are home delivered the next day, but the problem is the peak times when that is sometimes not possible.’

How does HEMA avoid having to deal with structural logistical undercapacity because not enough people are around to properly process all the orders?
‘We try to avoid peaks and troughs by spreading the promotions and actions better through the year. We also coordinate with our suppliers so that we do not have too much or too little stock. This allows us to run the logistics operation as efficiently and effectively as possible.
But the labor market is tight and will remain so for the next few years. I think the current wage inflation will also continue. The only solution is mechanization. In recent years, we have already invested heavily in this, especially in our online distribution center, where we have a different approach for each type of product. For slow movers, we have a shuttle system. For fast movers, an employee still physically collects it with an order picker. And for the group in between, we have a dynamic picking system. It is all very efficient. Some 20 years ago, it was said that you made a loss on orders under 50 euros. That has not been the case for us for a long time. Because we design everything ourselves and design the packaging and have it produced. And because we distribute it so efficiently.’

And home delivery? You now hire DHL for that last mile. Why would HEMA not do that itself? Or, while we are on the subject, why not include what you might call the last yard and start delivering packages from the store to individuals? Like flash delivery companies do, and like competitors have also started doing since the corona crisis?
‘We have now set up our home delivery process very efficiently. By using uniform box sizes, HEMA maximizes the loading capacity of DHL’s trailers for home delivery, resulting in significant efficiency gains and reduced environmental impact. We cannot beat that if we do it ourselves. And flash delivery? Maybe if customers are willing to pay for it. It seems unlikely to me, given the small amounts people spend on our products. Besides, it does not fit with our sustainability goals to deliver packages from the stores to our customers. That requires a lot of extra transport capacity and therefore more miles driven. We therefore choose delivery models that fit HEMA’s sustainability goals.’

Interview by Eelco Simon, partner at Valcon. Published in Management Scope 01 2024.