Apple of Your IT: Technology at the Core of Food Logistics
Food retailers and manufacturers are struggling to cut costs as they battle various channel service requirements, customer demands, and excess inventory. Here's how a steady diet of electronic commerce, data synchronization, electronic product codes and RFID is serving up savings.
The biggest force of change in the retail food/grocery sector today can be summed up in a single name—Wal-Mart. As the world's largest company, Wal-Mart has squeezed billions of dollars in cost efficiencies out of the retail supply chain—including the food chain. Wal-Mart wields its clout with almost every major U.S. consumer goods company.
Through aggressive everyday low prices and private-label strategies, Wal-Mart has changed consumer expectations about value. Average grocery prices in those markets Wal-Mart enters are 14 percent lower than those found in non-Wal-Mart markets, according to consulting firm Accenture.
"The net effect of Wal-Mart's buying power over consumer goods manufacturers is that the retailer is reducing an ever-greater number of products to mere commodity status, leaving little room for profits," Accenture says.
"If I'm a retail grocery chain watching my market dwindle from 70 percent to 35 percent," notes Jack Horst, a principal with Kurt Salmon Associates, "my burning issue has to be: how do I play in this new and different sandbox? I'd be very concerned that there wouldn't be room in this market for Wal-Mart, me, and all five of my competitors.
"And if I'm a food manufacturer," Horst continues, "I have to constantly look for ways to meet my customers' requirements while at the same time drive logistics costs down. This represents a huge, but not impossible, challenge."
From the food retailers' perspective, four strategic levers drive the business: price, assortment, service and format.
"Traditional grocery retailers are very promotion- and price-driven," Horst says. Competitive pressures on prices are enormous.
"If price-based promotions are a company's only strategy going forward," says Horst, "and it competes against the largest single grocer in the world, it's in trouble. It will never be able to compete with Wal-Mart on price over the long term. Tremendous sales volumes, coupled with a distribution system unmatched in efficiency, enable Wal-Mart to undercut any grocer's prices.
"For grocery retailers it comes down to this: No one can compete with Wal-Mart on price. So they better have a compelling story to tell on the other three variables," Horst says.
Retailers aren't the only ones feeling the brunt of Wal-Mart's clout. Food manufacturers have spent the last decade watching their once relatively simple distribution model splinter into multiple channels with highly disparate needs.
"Fifteen years ago," Horst notes, "all Nestle had to know how to do was ship to Giant Supermarket. Today, Nestle and other food manufacturers may have to serve as many as six different distribution channels—mass merchants, large chain supermarkets, independent grocers, clubs, drug stores, and convenience stores.
"Wal-Mart and Target want their merchandise in full cases, bar-coded with advance shipment notifications and soon radio frequency identification (RFID) tags," he adds. "Clubs want full trailer loads. Drug store chains want smaller quantities—broken case lots—sent to 1,000 different stores. Independent grocers want some combination of pallet quantities delivered to their DCs.
And convenience stores want small quantities delivered everywhere. Each channel requires its own distinct processes."
Serving these varied channels has increased supply chain costs for food manufacturers. Logistics-related costs rose 12 percent, from 6.6 percent of net sales in 1999 to 7.4 percent in 2002, according to the most recent Grocery Manufacturers of America (GMA) Logistics Study (2003).
This cost increase is a direct result of differing channel service requirements. It also stems in part from demand by food manufacturer customers for a more responsive supply chain—shorter order cycle times, for example. Order-to-delivery cycles dropped by more than three days since 1999, according to GMA.
The Biggest Opportunity
Burdened by such tremendous cost and margin pressures, where in the supply chain can food retailers and manufacturers shave costs? "The biggest opportunity," says Horst, "is the connection back to the manufacturer. Grocers have to rethink the whole way that merchandise is bought and moved through the supply chain."
Excess inventory continues to be a problem across the food supply chain, according to studies by the Food Marketing Institute and others.
"Grocers hold three to four weeks of inventory in their DCs," Horst notes. "Manufacturers hold another three weeks in their finished goods DCs, and stores carry three weeks of inventory on their shelves. So the industry as a whole today still carries about 10 weeks of inventory across the supply chain.
"For products with a demand pattern that is as stable as the rock of Gibraltar, this doesn't make sense," he adds. "Kraft, for example, can tell you exactly how much macaroni and cheese it will sell over any given time period. If the demand for macaroni and cheese is so stable, why do we need four weeks of inventory clogging the distribution center?"
To address this issue, food companies will gradually move to a more flow-through supply chain model.
"Having inventory at rest at multiple points in a channel is simply too expensive," says Denis Reilly, COO of third-party logistics service provider USFLogistics. "Companies must be able to provide higher service levels while avoiding inventory build-ups. Some companies centralize the distribution of slow-moving items in one DC, thereby rationalizing that inventory across the supply chain. This centralization enables a company to gain economies of scale in transportation and handling for these slower-moving items."
The real supply chain savings opportunity in the retailer-manufacturer ecosystem lies with collaborative commerce. Companies have talked about collaborative commerce for years, but few have realized its potential. One reason: lack of accurate standardized data across all trading parties.
In electronic commerce, collaboration can't fully succeed unless everyone speaks the same language. "The current system for exchanging data among trading partners continues to produce inefficiencies—including order errors, invoice discrepancies, delays in item introductions, and out-of-stocks—in the consumer product goods supply chain," notes the 2003 GMA Logistics Study.
Eliminating Incorrect Information
Thus in 2002, the industry began the difficult process of implementing global data standards, item catalogs, and data synchronization to help reduce the estimated $25 to $50 billion cost of incorrect information in the supply chain. This data synchronization forms the foundation for collaborative commerce.
In early August, two international standards bodies—EAN International and the Uniform Code Council Inc. (UCC)—launched the Global Data Synchronization Network (GDSN), a global, Internet-based initiative that enables trading partners to quickly and efficiently exchange supply chain data that is accurate, up to date, and compliant with universally supported EAN.UCC System standards.
The GDSN is based on a centralized, global registry that connects to numerous data pools around the world, enabling data to be standardized and synchronized for trading partners on a near-real-time basis.
How does it work? Suppliers connect directly to the UCCnet GLOBALregistry and UCCnet publishes their data to retailers. A trading partner may also use a Certified UCCnet Alliance Partner to publish to retailers.
UCCnet's registration and synchronization services enable suppliers and their retail partners to reduce costly administrative errors in invoice pricing, purchase orders, product delivery and scanning accuracy.
In addition, companies can increase the speed of getting new products to market and facilitate continuous exchange of changes to existing item information.
According to Connect the Dots, a February 2004 study conducted by A.T. Kearney and Kurt Salmon Associates and sponsored by the Food Marketing Institute, GMA, and the National Association of Chain Drug Stores, GDS produces substantial benefits for manufacturers and retailers alike.
Manufacturers' benefits include:
- Three- to five-percent reduction in shelf out-of-stocks.
- Two-week reduction in speed-to-market for new items.
- Seven- to 13-percent reduction in sales force time spent communicating basic item information to customers, following up, and resolving queries.
- A reduction in invoice write-offs that are incurred as a result of data discrepancies.
- Elimination of basic item data errors, currently found in up to eight percent of total purchase orders.
- 0.2- to 0.7-percent reduction in outbound logistics costs.
- 0.5-percent reduction in inventory.
Retailers' benefits include:
- Three- to five-percent reduction in shelf out-of-stocks.
- Two-week reduction in speed-to-market for new items.
- 10,000 to 30,000 hours saved in merchandising and data entry time dealing with new item introductions and updates.
- 1,000 to 2,000 hours saved in finance time dealing with invoice disputes related to basic item information.
- 0.5- to one-percent reduction in inbound freight costs.
- 1,000 to 2,000 hours saved in warehouse and direct-to-store delivery time dealing with item discrepancies.
- One-percent reduction in inventory.
Wegmans Pioneers UCCNet Usage
Wegmans Food Markets, a $3-billion food retailer operating more than 60 upscale supermarkets in New York, Pennsylvania, New Jersey, and now Virginia, expects to generate benefits of at least $1.5 million per year within the next five years once all of its major suppliers are capable of data synchronization.
Given an initial investment of approximately $300,000, start-up costs of $600,000 per year for the first two or three years to populate the data synchronization system, and ongoing costs of $100,000 per year to maintain the system, this translates into a return on investment well in excess of 500 percent.
Wegmans and Ralston Purina (now Nestle Purina PetCare) were the first pair of companies to synchronize item information for a complete product category using UCCnet in March 2001. By mid-2003, Wegmans was accepting synchronized item data from 50 suppliers. Ultimately, Wegmans expects to be in sync with more than 50 percent of its grocery warehouse items.
Analysis of shelf out-of-stocks at Wegmans shows that approximately five percent result from supply chain delays caused by data integrity issues, such as delays in purchase order processing, freight scheduling, warehouse and direct-store-delivery receiving.
By eliminating buying and supply chain delays due to catalog errors, data synchronization prevents these out-of- stock incidents, thereby increasing consumer satisfaction and generating several hundred thousand dollars per year in additional sales for Wegmans.
The upscale retailer sees data synchronization as a way to reduce its inbound transportation costs as well. Inaccurate information about item dimensions and weight frequently results in under-utilization of inbound trucks, and sometimes drives the need for extra trucks when a load is larger than expected.
By synchronizing weight and dimension data, Wegmans expects to increase inbound freight utilization and eliminate all instances of additional trailers due to unexpected overage.
Value and Benefit of EPC
Data synchronization is critical to the success of one very visible food industry efficiency effort—RFID. RFID technology, coupled with electronic product codes (EPCs), can provide more detailed, accurate, and frequent data messages about products in the supply chain.
While bar codes can tell a retailer that it has two boxes of product XYZ, EPCs help distinguish one box of product XYZ from the next. This allows retailers greater visibility in monitoring product inventory from supplier to distribution center to store.
In 2003, Wal-Mart decreed that its top 100 suppliers would implement EPC and RFID procedures and technology—starting with cases and pallets of product headed to three Dallas/Ft. Worth area DCs by January 2005.
By June 2005, Wal-Mart plans to go live in up to six distribution centers, and up to 250 Wal-Mart stores and Sam's Club locations. It will continue to roll out RFID across its supply chain.
The primary consumer benefit expected during initial EPC adoption is better merchandise availability. "We believe RFID technology is going to help us increase customer satisfaction in the near-term and ultimately play an important role in helping us control costs and continue offering low prices," says Linda Dillman, executive vice president and Wal-Mart's chief information officer.
Retailers such as Wal-Mart stand to gain significant labor and inventory cost savings from the adoption of EPCs and RFID tagging, but those benefits will come at a cost to manufacturers that apply the tags to goods.
According to A.T. Kearney, retailers will see: a one-time cash savings from a five-percent reduction in overall inventory; an annual 7.5-percent benefit in reduced labor cost; and a recurring annual improvement in out-of-stocks amounting to $700,000 per $1 billion in sales.
Like manufacturers, retailers will incur a one-time cost for installing readers and system integration at distribution centers and stores. But manufacturers will face the recurring cost of buying and applying tags to pallets and cases, as Wal-Mart is requiring.
"Until the RFID tag gets substantially cheaper, it is going to cost a lot when you think of the billions of cases moving through the supply chain," says Dave Donnan, the A.T. Kearney vice president who conducted the study.
The Integrated Chain
While all this talk of technology sounds exciting, technology is merely a tool to realize a far bigger goal—collaborative electronic commerce.
Leading food retailers and manufacturers realize that by successfully sharing and collaborating on forecasts, production, actual demand, product movements, inventory management, sales data and much more, companies gain sufficient visibility to manage food logistics as an integrated inbound and outbound supply chain.
"Where we want to go," says Dwight Klappich, vice president with the META Group, an Atlanta-based technology analyst firm, "is to create a network view of the world where the appropriate information is sent to the right parties in near real time so they can make good business decisions about managing their supply chain."
For food manufacturers and retailers alike—regardless of their format and size—the time to do this is now. The stakes could not be higher.
Planning In Predictability
Tyson Foods Inc., founded in 1935 with headquarters in Springdale, Ark., is the world's largest processor and marketer of chicken, beef and pork and the second-largest food company in the Fortune 500.
Tyson Foods produces a wide variety of brand-name protein-based and prepared food products marketed in the United States and more than 80 countries around the world. The company has approximately 120,000 team members and 300 facilities and offices in 26 states and 22 countries.
Managing such a large and far-flung supply chain is a constant challenge. "Historically," says Joey White, vice president, supply chain strategy and planning, "we have been very good at executing heroic efforts to get product produced at the last minute and ship it out to our customer. We're very good at fire fighting."
Fire fighting, however, doesn't make for an optimally managed supply chain. These so-called "fires" cause a number of problems, including operating inefficiencies in processing plants.
"Often when you put out one fire you create another one the following week, because you had to put something else in danger to create your immediate heroic solution," White says. "So you get into a situation where you're chasing your tail." All of this can affect customer service and resulting satisfaction.
Realizing it needed to remedy this situation, Tyson turned its attention to improving how it manages supply and demand—with the goal of preventing out-of-stocks, excess inventory build-up, and discounting.
"There is a constant battle between short-term goals of immediate customer requirements and long-term goals of demand and supply chain planning," White says. "The goal of collaboration is to overcome these conflicts as reasonably as possible.
"There are two pieces to our collaboration story," White says. "The first is internal collaboration—connecting all our planning processes across the organization. How does our demand plan match up to our production plan? We have animals growing for slaughter, and we have to match our demand to raw materials management and capacity planning. This can get very complicated."
To simplify this complexity, Tyson implemented a demand planning and supply planning software solution from Manugistics.
"The system gives our planners a choice of using different forecasting models depending on the nature of our demand," White explains. "Then the tools help us create a forward-looking production plan and connect it to our execution plan."
The Manugistics solution contains a tool called Collaborate, which Tyson uses for internal or external collaboration. Internally, the Tyson sales team can use the tool to provide better intelligence to demand planners about promotions. Demand planners can blend that data into the forecast accordingly.
Tyson can also use the Manugistics solution to collaborate with external customers. "What I would hope to see with all our customers is a movement toward building a consensus forecast," White says. "Forecasting efforts with our customers today tend to be very informal, with short-term interests sometimes sabotaging long-term objectives.
"We serve two distinct channels—retail and food service," White explains. "The channels are different, with different planning issues. In foodservice we predominantly go through distributors such as Sysco. The distributors, in turn, serve many different restaurants. Or for some of the bigger fast-food chains, we ship directly to their distribution centers.
"All of this means we have less visibility into demand than we do with retailers, but it's a smoother demand pattern because consumption is spread out over more customers."
The retail sector is more concentrated, with fewer players. "When a major retailer offers a promotion, it tends to have a bigger impact on us," White says. "This can cause greater order volatility.
"This volatility is somewhat offset by the fact that we get better intelligence from the retailer," he notes. "This helps our planning and fulfillment processes.
"Overall, if we collaborate to develop forecasts jointly with our customers we get a multiplication of accuracy and intelligence," White says. "In a forward-looking forecast, the customer will have more information about what kinds of promotions they are planning, whether there are any changes in store floor plans that might affect demand, and so on. We can work with the customer to create a more realistic forecast based on all the information we can gather.
"Ultimately," White concludes, "what we want to do is use great planning to get rid of 80 percent of those heroic fire-fighting activities. The way we do that is to see the future better.
"With a good, disciplined demand plan, we could see eight out of 10 problems coming at us ahead of time, and do something about them before they actually become problems."