Yvette Heijwegen (AS Watson): ‘Decision-Making With a Focus on Technological Flexibility’

When developing the supply chain, it often requires long term planning. How companies tackle this varies greatly depending on the business model, as revealed in previous discussions with retail companies for this interview series. For instance, HEMA needs to focus on the highly volatile consumer market and heavily relies on scenario planning. Conversely, a B2B company like Sligro, with predictable demand patterns, prioritizes efficiency. What is AS Watson’s approach?
‘We are constantly making adjustments to the supply chain, often based on scenarios, especially when it comes to large investments that might pay off only in a year or in two, three years. At the same time, we need to be able to deviate from these scenarios when necessary. Three things are crucial for our supply chain. Firstly, maintaining the right capacity is paramount – ideally not too much, but never too little. Flexibility is another key characteristic; we must be adaptable to market changes and ready for any opportunities that arise. Efficiency is also critical, coming in third. As a discount retailer, we must keep our costs low to offer competitive prices.
Our approach is exemplified by the Oosterhout distribution center, opened approximately a year and a half ago after decades of operating centrally from Heteren. Highly cost-efficient, yet not flexible enough in the long run. Therefore, we decided on a new distribution center, opting for a leased facility with capacity expansion possibilities. We explicitly opted for speed. Building a new facility ourselves would have taken too long. Here, it was possible to move in within six months of finding the location. We opted to use the premises as is: manual order picking, no mechanization. This allowed us to hit the ground running, observing market trends and learning how to run the new processes with two distribution centers. After a year, our growth exceeded our wildest expectations. That is when we realized we needed to invest more in mechanization than initially planned. We also gained insights in how to synchronize the flow of goods between the new and existing centers. Furthermore, we managed to connect more stores to the new distribution center and facilitated more supplier integrations. In essence, we proceeded incrementally, with maximum flexibility.’

You are referring to 'we.' Who exactly does that include?
‘With we I mean our supply chain management team. As a member of the executive board, I often discuss matters with our CEO and other board members. When it comes to significant investments, we present them to an investment committee based in Hong Kong, where our parent company is headquartered. So far, our proposals have always been approved. I believe that is because we have established a highly successful formula in the Benelux region. Overall, the supply chain management team has considerable autonomy. I am responsible for devising my own plans, negotiating with suppliers, and meeting my own budget targets. While we report to Hong Kong, they do not dictate our actions. There is a strong sense of confidence. In fact, we can even influence the broader group. For instance, we took the initiative to choose SlimStock's system for replenishment. Following our lead, other AS Watson companies embraced it, transforming it into a group-wide solution.’

Could you highlight a business case that received rapid approval?
‘Our new robotization project. Just before the pandemic hit, we created a plan to expand the e-DC in Ede, which was promptly approved, enabling us to proceed. Due to uncertainties regarding the demand for our products, we opted against immediately transitioning to a fully mechanized warehouse. Instead, we deployed 1.2 kilometers of conveyor belts to facilitate the movement of crates and customer orders. We overhauled our IT systems and implemented algorithms to streamline order picking. Additionally, we constructed mezzanines to create extra space.
The choice for the robotization project was made based on scenarios with an eye to technological adaptability. This entailed anticipating future technological advancements, such as robotics, despite their current developmental stage. While not yet fully developed, we recognized the inevitability of integrating such technologies into our operations. Subsequently, we conducted various robot trials and are now prepared to process orders and load items onto conveyor belts. With this swiftly approved goods-to-person robotization project, we can further mechanize our processes. This not only equips us for future growth with enhanced efficiency but also reduces physical strain for our workforce.’

Earlier, you mentioned three decision criteria. How much emphasis is placed on efficiency in this regard? Is product availability - and thus capacity and flexibility – not always more critical? In absolute terms: would you prefer maximum availability at slightly higher costs or minimizing costs at the expense of product availability?
‘It is not as straightforward as you put it. We aim for an optimal balance between availability and efficiency, continually striving to achieve that optimal availability. Firstly, because predicting consumer demand is becoming more and more challenging. Consequently, we are increasingly focused on enhancing flexibility throughout the entire supply chain, from supplier to store shelf. To effectively manage the rapid growth of e-commerce, for instance, we created our own marketplace. Here, our sales partners can receive orders directly from consumers. It is worth noting it is a curated marketplace, not open to all suppliers.
It is not only the developments on the consumer front that drives the layout of our supply chain and investments in capacity and flexibility, but we also factor in ongoing labor shortages and demographic shifts. We are inclined to invest in distribution centers if it streamlines in-store operations, allowing them to accomplish more with fewer staff. In essence, we evaluate which tasks can be shifted from the store to the DC. How can we, for instance, get an item directly onto the shelf without it needing to be stored in the warehouse first? This enables our store colleagues to focus entirely on serving customers visiting the store. Particularly with fast-moving items and promotion-driven in-out products, we increasingly aim for just-in-time deliveries based on data from our replenishment system.
Another emerging theme of significance is sustainability. For years, we have been collecting all plastic and cardboard waste from our stores to process in our own recycling center. Additionally, we are collaborating with suppliers to explore smarter packaging solutions—ones with fewer plastic strips and packaging materials, or with plastics that have a smaller environmental impact.’

Do you ever opt to temporarily shift operations to a third-party distribution center or have a third party set up a distribution center? In other words, outsourcing parts of the supply chain?
‘We consider logistics and warehousing to be the backbone of our retail model. We do not believe that someone can handle it more efficiently and flexibly than ourselves. It has happened that we rented temporary space in an external DC to manage peak demand. However, we prefer not to do so. Experience has shown that you are either very flexible and expensive, or very efficient and inexpensive but inflexible due to being tied to various service level agreements. Whereas we excel at combining the two. That is where we can make a difference. However, we do outsource the delivery of items from our DCs to the stores, with all packages from our e-DC being handled by PostNL. This includes deliveries to both our stores and directly to consumers.’

What developments do you foresee for transportation to the stores?
‘As mentioned, sustainability is an important theme for us, and this certainly applies here. Obviously, transportation needs to become even more sustainable. But this is by no means an easy task. The legislation in this area is still far from settled, which is a problem. As it stands, by 2025, we may be barred from entering around 30 cities unless we achieve zero emissions. We are committed to achieving this, but we face some significant challenges. We currently have a number of hybrid trucks and now also two electric vehicles. However, expanding this fleet is impossible due to congestion in the electricity grid, preventing us from obtaining the capacity to charge additional vehicles. So, we need to explore alternatives. Perhaps we should consider working with partners? Or installing batteries? We will be working on various scenarios, no matter how challenging this may be.’

Imagine being able to dream about what the world will look like in 2030. What changes in the company and in your work would you like to see in the coming years?
‘First and foremost, further growth for the company. We have initiated the process of mechanization and robotization; I hope that by 2030, heavy lifting and manual labor tasks can be handled entirely by robots. Additionally, I hope to see the entire supply chain, from supplier to store, elevated to a higher level by 2030. We have a strategic program, one of its pillars being simplification and optimization. By 2030, this should hopefully result in a much leaner operation as we streamline and automate various processes. Mechanization and robotization in the DCs will have advanced significantly by then.
Furthermore, I hope that all of this will have contributed to making work in the stores more enjoyable and less stressful. Items will more frequently go directly onto store shelves without needing to be stored in the warehouse, allowing for even better customer service in-store.’

This article was published in Management Scope 05 2024.