Cold Storage: Optimization by Degrees

Tags: 3PL, Warehousing, Temperature Controlled, Temperature-Sensitive Goods, Food Logistics

Thermometer registering a low temperature

As the food industry gets a taste of rising prices, fluctuating energy costs, and new regulations, shippers develop a growing appetite for 3PLs and refrigerated public warehouses to help drive greater efficiency inside the four walls.

When things go sour in the food supply chain, there's no recourse. That's the nature of the business. Quality and safety are paramount. Chain of custody is sacrosanct. When one link fails, the consequences are considerable.

What makes cold storage logistics unique also makes it challenging—the energy required to maintain temperature-controlled units in transport or in refrigerated and frozen storage facilities; the sensitivity to exceptions; the lack of automation; differing standards among value chain partners; and stockkeeping unit (SKU) proliferation.

More telling, U.S. food prices are on the rise, and will likely remain high due to gains in beef, poultry, and eggs, according to recent U.S. Department of Agriculture figures. Overall food costs are expected to increase up to 3.5 percent in 2014 due to drought, and changing global and domestic dynamics.

One example of these changing dynamics: In 2013, the U.S. cattle herd was at its lowest level in 60 years. Corn ethanol subsidies indirectly reduced supply, and increased feed costs for ranchers. Beyond that, growing demand for beef in expanding middle classes around the world makes exports a more profitable opportunity.

Supply and demand patterns are changing, and food supply chains are feeling the pinch. "Food producers either have to raise prices or become more efficient," says David Stuver, vice president of engineering at Atlanta-based third-party logistics (3PL) provider Americold Logistics—the world's largest cold storage company.

Innovation is the key to addressing the price/efficiency dichotomy, Stuver says, and it boils down to four areas: energy; delivery miles to stores; labor optimization; and working capital as it relates to better use of inventory.

Even still, the cold chain is hyper-sensitive to certain questions and conditions beyond normal supply chain parameters: What if a temperature sensor is triggered? What if visibility is compromised at an intermodal exchange? What if packaging is tampered with? What if a product needs to be recalled?

The concern over recalls was a point of emphasis when President Obama passed the Food Safety Modernization Act (FSMA) in 2011, updating guidelines that had been left untouched for 70 years. Since then, the U.S. Food and Drug Administration (FDA) has been seeking comments from industry stakeholders in a process that will eventually establish new rules for the industry (see sidebar).

Amid uncertainties about how these changes will impact current protocols, growers, producers, distributors, public warehouses, and 3PLs agree that the costs of compliance will only grow. As the cold chain prepares for this regulatory restructuring, participants are challenged to dial up the best measures for controlling both temperature and spend.

CONTAINING Costs

Cost containment and reduction are the biggest drivers for supply chain practitioners. But in the cold storage and distribution space, that reality is amplified by degrees.

Rising prices are a concern for food shippers—especially smaller mom-and-pop producers and distributors. Profit margins are slim, and seasonality is fickle. A spike in costs can have a ripple impact throughout the supply chain. As a result, many food producers and distributors depend on 3PLs and public refrigerated warehouses to help drive out costs. In turn, service providers are doing their part.

"We've invested heavily in green initiatives and energy reduction programs, but in the long term, energy only has one way to go: up," says Doug Harrison, president and CEO of Vancouver, B.C.-based VersaCold. The 3PL operates 33 facilities across Canada, with five business units covering transportation, 4PL, 3PL, warehousing, and distribution services.

Energy costs are also a concern for Hillsboro, Ore.-based Henningsen Cold Storage, which operates 10 facilities across the United States, but has a heavy market presence in the Pacific Northwest. Both VersaCold and Henningsen have invested in equipping their facilities with green features, including LED lighting, variable speed motors for boiler rooms, and evaporators and compressors, as well as R-value insulated panel materials to seal walls and ceilings.

Ensuring cold storage facilities are properly maintained to protect the integrity of refrigerated and frozen products comes at a cost. Insulating the end customer—whether it's the consumer, retailer, or distributor—from price fluctuations is challenging.

More shippers are focused on pricing than on solutions-oriented partnerships, notes Tony Lucarelli, executive vice president at Henningsen. It's a cyclical phenomenon, but one that is again trending toward transactional, given current economic circumstances.

"Shippers are trying to take cost out of the supply chain," adds Stuver. "They are addressing packaging changes, and maximizing cube. Retail ordering behaviors are changing rapidly. We're seeing higher case-pick volumes. That's pushing the work upstream in the supply chain."

The food supply chain is heavily influenced by changing consumer tastes. New attitudes toward different foods, and growing appreciation for America's ethnic diversity, have an impact. The e-commerce phenomenon has similarly spoiled consumer expectations. Shoppers are accustomed to getting what they want. Food supply chain players are stocking more types of product, which adds complexity.

Automation Slow Motion

"More SKUs are entering our facility from a broad range of shippers," says Harrison. "The challenge of SKU proliferation—whether refrigerated or dry—is that the more you have, the less picking efficiency there is. That drives complexity. Packaging requirements are changing in terms of box size, which impacts the picking configurations within a building."

Lucarelli notes a distinction between different types of cold storage shipments. "Refrigerated product, which has a shorter shelf life, lends itself to smaller orders at greater frequencies," he says. "Many manufacturers' customers need to receive dairy products two or three times per week, as opposed to a load of frozen product coming in once weekly."

Consequently, shippers and service providers are challenged with optimizing labor-intensive warehouse management processes. Automation is constrained in cold storage for a number of reasons.

"As long as we're handling products for multiple clients in a facility—which is our business—it's difficult to automate," says Lucarelli. "Some companies are automating pallet movements. But when it comes to selecting orders and picking less-than-pallet quantities, then physically loading a truck outbound to a grocery store DC—that's not automated. A human factor will always be involved."

Accommodating Complexity

Most public refrigerated warehouses and multi-tenant DCs require flexibility. Customers, products, and services change. Automation works well when the focus is dedicated—a private facility, for example, with one manufacturer and a high volume of the same type of product.

"As a provider, we're curious about automation," says Harrison. "But a refrigerated or frozen storage facility presents challenges. Changing SKUs and packaging dynamics add degrees of complexity to automation."

Perhaps the biggest obstacle to automation is cost. Some of the best examples of cold storage automation come from Europe, where materials handling manufacturers and integrators are light years ahead of U.S. industry because labor costs and constraints define that market, explains Stuver. European distribution systems were forced to adapt earlier. Now U.S. companies are headed in the same direction. But the cost to import these types of systems is prohibitive, and domestic options are limited.

Still, automation is the wave of the future. "We are 100-percent focused on leveraging it," says Stuver.

While automation traction remains sluggish, shippers are demanding more value-added capabilities—whether it's technology or more sophisticated logistics services—from their supply chain partners. Cost containment has always been a priority. But Harrison sees more shippers evaluating how they can collaborate to increase profitability and reduce inventory.

"We're performing more packaging and labeling for shippers," he says. "They want to continue to outsource and gain cost efficiencies. Keeping product in bulk until the last possible moment allows them to reduce inventory levels, and package to a specific brand name, quantity level, or SKU requirement."

Henningsen also provides these services, especially for shippers that don't have the resources on site, or have decided to uncouple that function from their production process. "Shippers store their inventory with us, so it's a logical place to have that re-packaging capability," adds Lucarelli.

The changing nature of cold storage logistics, and expansion of value-added capabilities, only raises the stakes for looming food safety regulations. While the FSMA is still seeking comments for several provisions in its proposed rulemakings, industry associations such as the International Warehouse and Logistics Association have issued concerns about how government defines third-party-logistics providers—especially as more 3PLs take on additional responsibilities beyond traditional storage.

Regardless, when the FSMA rules are eventually finalized, a learning curve will drive value chain partners to make efforts to understand and achieve necessary compliance requirements. Many 3PLs and public warehouses are already anticipating these changes. VersaCold, for example, is using more real-time monitoring and sensing equipment to ensure temperature compliance throughout its network.

"We implemented a number of WMS upgrades to provide us e-capability for track-and-trace and recall management from the pallet to the license plate to the SKU level," explains Harrison. In the event of a recall, these capabilities will expedite response times.

Much of what the FSMA proposes comes down to lot traceability. "That's a technology challenge that the supply chain has not managed well," notes Stuver.

Standard Practice

The industry is also focusing on standardization. Henningsen has been trying to stay ahead of the curve by making sure its 10 facilities are compliant with food safety regulations. For example, it has voluntarily invited independent third-party auditing agencies to come in unannounced and perform a full gamut of assessments. It's also pursuing a few food safety audit standards under the Global Food Safety Initiative—a program that was created in 2000 to bring together industry stakeholders to address critical issues.

"Taking these steps adds expense and complexity to our facilities, but it's a natural progression," says Lucarelli. "That's where the industry is heading, and we have to be prepared to comply with and manage these programs."

In the face of rising food prices, fluctuating energy costs, and regulatory measures that will further squeeze food chain participants, supply chain innovation is the only resort. Technology investment, business process change, and standardization are the keys to better energy efficiency, labor optimization, and cost reduction.

It's matter of seeing the food supply chain for what it is—a commingling of different players with varying levels of sophistication and resources—and recognizing, as the old adage goes, "It's only as strong as its weakest link."