Fast Food Logistics: Having it Your Way
Variety and freshness are paramount to keeping fast-food customers hungry for more and supply lines and inventory ripe and ready for change. Fast-food chains look to logistics service providers with a similar craving for made-to-order selectivity, quality, and service—all at an affordable cost.
Delivering quick meals at reasonable prices in an ever-changing marketplace is no small billing, especially as chains prep against soaring fuel costs, product quality concerns, and nutritional mandates. Moreover, average-Joe consumers are fickle about what they like and how they like it.
Restaurants routinely cook up new menu items and marketing gimmicks, then work with distributors and service providers to bring new ingredients to the back door, items to the menu, and meals to the table—with flexibility and speed you won't find in bumper-to-bumper drive-through lanes.
"Both speed-to-market and speed-out-of-market demands make the food service industry unique," observes Scott Deibert, vice president of supply chain for Steak 'n Shake, an Indianapolis-based chain.
"A continuous stream of limited-time offers (LTOs) requires planning promotions and managing variables within a flexible supply system. Obsolete inventory means you have too much; dissatisfied customers means you have too little."
Over the past few years, the supply chain demands of LTO promotions have set the industry apart, placing a premium on keeping stocks low, turning inventory, and delivering perishable shipments with just-in-time urgency and care.
"The shelf life of food requires a management strategy that other industries do not. We have to drive more frequent inventory turns from supplier to chain operator," says David Cox, president of ARCOP, a purchasing and distribution cooperative for Atlanta-based Arby's.
Beyond speed and reliability, quick-service restaurants are all about value, preparing meals at the lowest cost possible. This sensitivity to cost permeates the segment, and raises the stakes for reducing transportation and inventory carrying costs up and down the supply chain.
"Given where today's commodity markets are—from fuel to grains—it's one of the most difficult times the fast-food sector has faced. We're peeling back every layer of the onion to identify hidden and total landed costs," says Cox.
That onion keeps getting smaller, so predictably the industry's commitment to and reliance on strategic outsourcing partnerships continues to mushroom in importance.
"In and Out. That's What Fast Food Is All About"
When ARCOP first partnered with ArrowStream, a Chicago technology and freight logistics solutions provider, the Arby's cooperative was primarily a nuts-and-bolts purchasing organization.
"We needed to evolve into a world-class supply chain organization," says Cox.
ARCOP, which serves 3,600 corporate-owned restaurants and individual franchises across the country, recognized that boosting supply chain visibility could go a long way toward preserving and growing brand loyalty, while strengthening business relationships.
"Before partnering with ArrowStream three years ago we had little visibility. Our mentality was 'green visor, rubber mallet'—beat the supplier over the head to get the right price," Cox acknowledges.
"But we realized we had to develop stronger relationships with suppliers and distributors and drive greater visibility to manage the supply chain—increase connectivity among our 17 DCs and gain deeper insight into purchase orders and inventory levels."
Restaurants traditionally have a poor view of their supply chains, largely because they work with multiple independent distributors, observes Rodger Mullen, president and COO of ArrowStream. Networks are often not dedicated, but rather a patchwork of disparate systems, so visibility into the flow of goods from manufacturer to restaurant is lacking.
Mounting price pressures and consumer demand for more stringent quality standards and controls, however, are pressing chain operators and distributors to aggregate greater control over inventory and shipments.
To fill this gap and serve as a conduit for improved connectivity, ArrowStream provides an umbrella operating system with plug-in applications that help food service businesses better manage their supply chains.
Using the 3PL's OnDemand suite of supply chain solutions, ARCOP now can ascertain complete store stock visibility, monitor exceptions, assess inventory needs, and track product movement from supplier to chain daily.
"Most operators order from the distributor electronically. So we establish landed costs for the distributors, and restaurant chains order product directly from the DC," explains Cox.
Having this detailed level of data allows both Arby's and ARCOP to capture demand signals and position inventory for optimal efficiency when expanding or contracting special promotions. Supply chain transparency is a make-or-break deal when serving up LTOs.
"The visibility we have into product movement enables us to effectively and efficiently manage supply during LTOs. Instant visibility lets us scale back or scale up production, or to move product between DCs to minimize outages or obsolete inventory," Cox observes.
Consequently, Arby's has enjoyed considerable success exploring and executing new LTOs and menu items. When it first began working with ArrowStream, it managed 19 different promotions and 41 new SKUs every year. Now those numbers have climbed to 51 promotions and 124 new SKUs.
The complexity of planning new offerings and aligning distribution and supply lines within tight time parameters, and with little room for error, warrants visibility and flexibility.
"Companies that can manage LTOs properly and more frequently gain a distinct advantage over competitors," says Cox.
"Better Ingredients. Better Outsourcing"
Restaurant chains and distributors have found similar success leveraging ArrowStream's freight optimization network to enhance visibility into transportation costs, and therefore create more efficient loads and routings.
Prior to outsourcing its freight management in 2006, Steak 'n Shake was limited in how it could efficiently and economically match demand with available assets, then streamline routes and optimize capacity utilization among its 503 U.S. restaurants. As a result, it often used more expensive less-than-truckload (LTL) shipments to meet replenishment needs.
Straddling the casual dining and fast-food divide with a production system oriented to both make-to-order meals and drive-through business, Steak 'n Shake's business model and supply chain demands flexibility—the kind that can pool shipments and consolidate transportation moves to reduce costs.
ArrowStream's transportation network delivers just that: leveraging volume from more than 200 distribution centers and 61,000 trucking lanes to create cost-efficient full truckloads and optimal routing.
As ArrowStream brings new customers, DCs, and suppliers online, it optimizes the network—continuous improvement that Deibert values as he streamlines Steak 'n Shake's supply chain. The altruism created among chains, distributors, and suppliers makes ArrowStream's network unique. The 3PL optimizes its network as a collective so everyone shares in that gain.
Small chains such as Steak 'n Shake secure access to a larger freight network that includes bigger restaurants, and can leverage critical mass to pool shipments and consolidate loads to drive down transport costs. "Even large networks can gain efficiencies by adding smaller ones," says Mullen.
This breadth of resources and visibility allows chains to break out freight costs and identify where inefficiencies reside, rather than simply negotiating with carriers on price alone.
"ArrowStream removes the blinders upstream and downstream to identify revenue opportunities," explains Deibert. "Instead of only using my single chain freight volume and getting inefficient freight quotes limited to Point A to Point B, now I am able to bundle my shipments with all the routes and freight volume in the ArrowStream network, from Points A to B to C and back to A."
The 3PL's scale delivers value in spades. "Twenty in-house workers could never achieve what ArrowStream accomplishes because of this wealth of information," he adds.
Consequently, using ArrowStream, Steak 'n Shake has cut 25 percent from its transportation costs, and Deibert predicts efficiencies and savings will continue.
ARCOP, which initially partnered with ArrowStream to increase its IT bandwidth, has likewise found the freight network to be gravy, says Cox.
"ArrowStream has visibility into its entire transportation network, which gives us the ability to pair up movements with different customers in similar locations," he says. "It helps us move freight at a lower cost. This is where efficiencies come into play."
Choosing from a broader network of carriers and lanes gives ARCOP greater control over inbound moves and the flexibility to specify transportation from suppliers if warranted. "Our freight efficiencies result from improving how our suppliers move product to our distribution centers," Cox observes.
"When You're Here, You're Family"
This demand-driven pulse is beating throughout the fast-food industry, and swayed The SYGMA Network, Dublin, Ohio, to outsource its freight management to ArrowStream.
Distributing food products exclusively to chain operators, SYGMA, a wholly owned subsidiary of Sysco Corporation, realized that as customers demanded more control over their own inbound moves, margins for improving transportation management in-house were shrinking.
Instead of competing against chains to squeeze and recoup costs, in 2002 SYGMA took a more pragmatic approach. It partnered with ArrowStream to coordinate transportation from suppliers and use its network to optimize supply chain operations.
The benefits have been clear. On the outbound side, the distributor reduced delivery frequencies, rationalized inventory vs. miles run, located more inventory in more DCs, and cut distribution distances.
For inbound moves, "it's all about creating efficiencies, making it a win-win for us and our customers. In the past, our collective goals weren't aligned," says Steve Deasey, president and COO of The SYGMA Network.
Shipments in ArrowStream's network are planned to create more continuous loops, so truckloads are optimally loaded when they move in and out of warehouse facilities.
For asset-based distributors that run their own fleet of trucks, such as SYGMA, the 3PL's freight optimization and modeling capabilities allow them to fill backhaul volumes and analyze asset utilization.
This level of control extends back to SYGMA's suppliers, where ArrowStream is helping manage inbound moves.
"Eighty percent of inbound shipments into a distributor are manufacturer delivered, which means that leg has not been optimized for efficiency within the network," says Mullen. "The manufacturer dictates the third-party carrier and bundles transportation into the overall cost."
ArrowStream is converting some inbound volumes into 3PL-managed routes. Transportation costs remain the same, but distributors and restaurants realize additional income.
Mullen has also seen growing interest from manufacturers looking to divorce themselves from the freight aspect of the business entirely.
Above all, greater networking among partners creates a tighter supply chain.
"Not only do we deliver greater inbound freight savings to customers, but we act as a long-term partner," Deasey says. "This commitment to sharing data in the system creates a stronger distributor-chain bond that is difficult to break and makes it less likely that a customer will switch to another distributor."
"Now That Your Tastes Have Grown Up"
As with any successful outsourcing relationship, divesting non-core freight management responsibilities allows Steak 'n Shake the time and operational bandwidth to concentrate on uncovering efficiencies elsewhere in its supply chain.
"With commodity prices as they are, we can focus on underlying cost structures in product manufacturing—analyzing inefficiencies at the back door of the supply chain," says Deibert.
This raises other questions: Are distributors operating as efficiently as they can? Are suppliers in the right locations?
The data Steak 'n Shake draws from ArrowStream's network provides a valuable resource when creating RFPs for new distribution centers. "It gives us a data package that we can take to potential partners so they can provide more accurate proposals," Deibert explains.
The restaurant is also exploring the connectivity between its DCs and suppliers to tighten slack networks.
"In the past, large DCs would move product long distances, with the focus on optimizing the facility," Deibert adds. "Today the inclination is toward mixing centers that feed smaller facilities located closer to the marketplace. A hub-and-spoke model requires determining where to locate suppliers."
Using ArrowStream's optimization and modeling technologies, Steak 'n Shake can compare lane/rate bases and configure optimal distribution networks.
Moving forward, Deibert also sees a ripe opportunity to re-think how the restaurant manages its lone distribution facility in Bloomington, Ill.
"We would like ArrowStream to manage inventory in the facility. Because it has visibility into all our outbound moves and purchase order placement, it has the flexibility to create greater efficiencies," he says.
Deibert compares such a scenario to vendor-managed inventory, using a third-party logistics provider instead of a manufacturer. Because it has total inventory visibility within Steak 'n Shake's system, placing ownership of product with ArrowStream might present even greater incentive to drive efficiencies and cost savings.
"This would provide us with the ultimate outsourcing control," says Deibert.
"In Sight It Must Be Right"
Both SYGMA and ARCOP recognize the value ArrowStream brings to improving transparency within the fast-food chain so partners can measure and track product quality, then trace problem inventory if recalls occur. This is especially true for franchises that purchase product from local sources outside their centralized supply networks.
"Historically, produce would largely be sourced and purchased locally," says Deasey. "In light of the recent salmonella scares, chain operators want greater control. They are moving toward centralizing purchasing and bringing products through main distributors."
ARCOP, for example, is looking to integrate localized supply bases into its network. "Certain food categories, such as produce and baked goods, still rely on local purchasing," Deasey adds. "Some franchises buy from local suppliers who fall off the radar screen. We'd like to move them into a structured DC channel."
Managing supply chain partners under one operating system only increases accountability, as well as collaborative responsiveness when exceptions inevitably materialize.
Even as transportation and commodity costs and a recent spate of produce recalls force corporate introspection with a corrective mindset, Mullen sees opportunities where the ArrowStream network can help shippers exploit new opportunities while addressing existing concerns—for example, meeting green mandates and consolidating loads to reduce transport spend.
"Logistically, we want to build more efficient truckloads," Mullen says. "We want to cube out trucks, make 36,000-pound loads 44,000 pounds, route four percent empty miles vs. 10 percent empty miles. This equates to less energy use.
"By doubling network optimization, we want to reduce shipments, which alleviates cost, capacity, and driver turnover pressures," he says.
Tough economic times are taking their toll across the industry, Deasey acknowledges. When your value proposition is delivering value, and costs are rising, putting freight management in capable hands makes sense.
"We're in a better position to withstand the current economic downturn and well-positioned for when things turn around," he says.
Limited-time offers come and go in the fast-food industry.
ArrowStream is giving restaurants and distributors some food for thought, with an outsourcing promotion that has long-term appeal.