Shopping for Supply Chain Excellence
Food companies embrace collaboration and supply chain technology in their quest to deliver service, selection, and savings.
Last year, U.S. consumers made an average of 75 trips to supermarkets, and visited grocery stores three times as often as they went to any other type of retail store, according to the 2002 Triversity Top 100 Retailers ranking, based on an annual survey and published in the July issue of Stores magazine.
So it's not surprising that traditional non-grocery retailers are vying for the food shopper's dollar by adding food products to their stores.
"The current Top 100 ranking shows grocery stores battling discount supercenters, while drug stores go head to head with them both," says Rick Gallagher, publisher and vice president of Stores.
In the battle to win the consumer's food dollar by delivering service, selection, and savings, retailers are using every tool in their arsenal—including supply chain management—to improve service and contain costs. And they're looking to their suppliers for help.
Sowing Wild Oats
Take Wild Oats Markets Inc., a national natural and organic foods retailer. "Ultimately, we want a supply chain partner that will help us to be a leader in the natural and organic products industry as we continue to grow our business," says Perry Odak, Wild Oats president and CEO.
The company recently conducted a review and analysis of its distribution system and supply chain "to determine the best logistics partner and system that will enable Wild Oats to optimize its overall supply chain, leverage purchasing power, reduce costs, and improve service to stores," Odak explains.
Next month, Wild Oats will begin working with Tree of Life Inc., a global natural products distributor, as its primary national distribution partner. Wild Oats says it expects the new distribution relationship to "reduce current procurement and logistics expenses through competitive product costs, consolidated management of freight and logistics, and reduced store expenses through consolidated deliveries."
Wholesalers/Distributors Battle for Dollars
The battle for the food dollar isn't just taking place on the supermarket floor. Wholesalers and distributors are also battling for food retailers' dollars.
Take 7-Eleven Inc., for example, which recently conducted a months-long search for a primary wholesaler. According to 7-Eleven, the company "found itself in a favorable environment" during the bidding and negotiation process—which involved a number of leading national wholesale providers—and was able "to negotiate new terms including improved cost of goods, increased service-level standards, and the flexibility to develop, test, and implement innovative new demand chain solutions."
7-Eleven announced made the decision to remain with McLane Company Inc. to supply the convenience retailer's U.S. stores with products including all grocery and frozen food. The stakes are high. If recent experience holds true, says 7-Eleven—which operates more than 5,000 stores in the United States—the convenience store chain will buy "an estimated $2 billion in goods annually from McLane."
An interesting sidenote: McLane Grocery Distribution (see sidebar, below) is a wholly owned subsidiary of Wal-Mart, whose foray into the grocery business is really turning up the heat in the food industry. Wal-Mart, which added a full-service grocery department to its Supercenters in 1988, announced in May that it would begin rolling out Supercenters in California this year. It hopes "to open as many as 40 Supercenters in the state over the next four to six years." Nearly one third of the roughly 100,000 items carried by Supercenters are grocery items.
"Over the last several years, Target, Wal-Mart, and K-Mart have been moving aggressively into the food industry," notes Jesse Laver, a consultant with Solertis, an Atlanta-based warehouse operations/transportation consulting and project management firm. "That has put a lot of pressure on the grocery store chains." Consolidation among some grocery chains has been one of the results of this development.
Increasing Supply Chain Effectiveness
Another critical result: food companies are being forced to look at ways to increase the effectiveness of their supply chains in order to stay competitive, according to Laver.
Food manufacturers and retailers are increasingly working together to improve supply chain effectiveness through initiatives such as collaborative planning, forecasting and replenishment (CPFR). A study by the Grocery Manufacturers of America indicates that 67 percent of its member companies are engaged in some form of CPFR activity.
"CPFR initiatives use technology and a standard set of business processes for Internet-based collaborative forecasting and replenishment, with the ultimate goal of improving efficiencies across the supply chain, reducing inventory, improving service levels, and increasing sales," according to GMA.
Food giant Nabisco has long been involved in CPFR. "We look at CPFR as bringing supply chain management and category management together," explains Rick Blasgen, vice president of supply chain for Kraft Foods North America (and formerly vice president of supply chain for Nabisco).
While Nabisco's focus has shifted temporarily to finalizing its merger with Kraft Foods, collaboration has been a top priority for Nabisco. "We wanted to take advantage of the information provided through collaboration," Blasgen notes.
Nabisco implemented a CPFR pilot program involving Nabisco's Planter's brand and several retail partners, including Wegman's, the first retailer to participate in the pilot program.
"Through the Wegman's pilot, we were able to prove the CPFR model, and that we could grow market share," Blasgen explains. "It was a good learning experience, and proved that collaboration could work."
Following the pilot effort, Nabisco began evolving the CPFR model and developing better processes. "The tools weren't available to accommodate a lot of volume between multiple customers," Blasgen says. Nabisco had to do forecasting manually.
Technological tools have improved since the pilot program, so should no longer act as a roadblock to collaborative efforts. "The technology end of it will work out as products evolve," Blasgen says. The big issues, he says, are that CPFR requires long-term planning and a willingness to share information on those plans.
The cost of implementing CPFR, lack of technology standards, hesitation to share information, quality of store-level and distribution center-level data, and a need for more employee training are seen as factors that may be inhibiting companies from moving more rapidly on CPFR initiatives, according to GMA.
Despite the challenges, CPFR pilot efforts are seeing some results. Two thirds of experienced CPFR users report improvement in forecast activity, with 56 percent reporting a decrease in inventory, according to the GMA study. Grocery manufacturers are far more likely to partner with mass merchandisers on CPFR initiatives, the study indicates, with 71 percent collaborating with mass merchandisers, compared to 35 percent collaborating with grocery retailers.
"Another area where the food industry is embracing the concept of collaboration is in outbound transportation," says Jesse Laver. Two of the biggest shippers participating in Solertis's Collaborative Transportation Network—which helps companies with private fleets find backhauls—are Campbell's Soup and Kellogg. Food companies are also working together on their own through industry associations to tackle common problems, such as unsaleables.
Scan-based trading (SBT) is another avenue grocery retailers and their trading partners are exploring. SBT is a next-generation supply chain management process that shifts the traditional business model between trading partners from delivery-based to a collaborative process that is point-of-sale (POS) based. POS scan data is used to drive settlement, replenishment and promotion between retailers and suppliers.
The quantity of product delivered, the quantity scanned and the quantity of shrinkage are all reconciled to the actual physical inventory of the product on a regular basis, according to a white paper published by The viaLink company, a third-party provider of SBT services.
In this process, the supplier reports the quantity of product delivered to the store (but is not required to go through the check-in process with a retail clerk). The supplier also conducts periodic physical inventories. The retailer's responsibility is to report scan sales. All the product movement and inventory data is shared jointly among the trading partners daily.
SBT impacts multiple areas across the supply chain such as sales increases (three to four percent, according to the GMA), reduced inventory costs for the retailer, and reduced distribution costs for the supplier.
As SBT becomes more widely used, the flow ratio—which viaLink describes as "the ratio of consumer purchases to deliveries over a specified period of time"—has emerged as a key management metric. A flow ratio of 1.0 is ideal, meaning that product is flowing into and out of the store at the same rate. Less than that can signal an inventory build-up, while a higher ratio may flag a potential out-of-stock situation so that the supplier can take steps to resolve it before it occurs.
Thanks to SBT, Meijer Stores has seen more effective allocation of capital that is no longer tied up in inventory, viaLink reports. Other benefits include reduced backroom check-in expenses and improved customer service.
Earthgrains/Sara Lee reports that using scan-based trading reduced short pays by 86 percent and overpays by 87 percent, and slashed the error resolution cycle time from 10 to 30 days to an average of two days. Schwan's Consumer Brands/Tony's Pizza Service found that SBT reduced distribution costs to retail stores by more than one third.
"Scan-based trading is an emerging best practice that is gaining acceptance across the supply chain for companies large and small as the body of documented benefits grows," says Betsy Hill, director of marketing for viaLink. "SBT is a true collaborative process that is creating competitive advantage for innovative food companies today."
From procurement to the warehouse, from the dock to the store floor, food companies are applying technology in their quest to keep the lid on costs while improving service. Here are some examples:
Ahold, a multi-local food provider operating more than 1,600 stores grouped in six retail operating companies along the U.S. eastern seaboard, will use Agribuys for perishable e-procurement through its centralized Perishables Procurement Operation (PPO). The PPO, based in Boston, will manage procurement for all of Ahold's U.S.-based operating companies.
The Agribuys technology is a hosted collaborative commerce solution that enables transactions between a retail grocer's back-end accounting and warehousing systems and the corresponding systems at its suppliers and transportation carriers. The Agribuys technology is expected to process more than $13 billion in purchases in produce, meat, poultry, seafood, bakery, deli, and floral items for Ahold.
Price Chopper Supermarkets has recently finished an initial pilot of IMI Retail software from Industri-Matematik International Corporation to manage store replenishment for more than 100 supermarkets. Price Chopper uses the solution to leverage a combination of consumer-demand forecasts, point-of-sale data, and promotional information to generate store orders that are matched with product available from suppliers.
IMI Retail is now being integrated with other Price Chopper business applications, interfacing with back-door receiving systems (including warehousing) to manage changes to stock status based on inbound receipt of goods to the store. At its headquarters location, the solution will be integrated with Price Chopper's central warehouse management and order delivery systems.
Food companies are also looking to technology to increase efficiency in the warehouse. "Voice-directed order picking is very hot in the food industry," notes Jesse Laver. For example, Mid Mountain Foods, which serves as the warehousing and distribution center for 86 supermarkets in the tri-state region of southeast Kentucky, southwest Virginia and northeast Tennessee, is using voice-activated order selection. Hosting it is a fulfillment solution from EXE Technologies.
Mid Mountain is also using the engineered labor standards component of the EXE solution, which has enabled the food company to significantly improve utilization of its forklift truck operators. Better organization of resources enabled Mid Mountains to move from 36 to 20 forklift truck operators at one facility.
Shaw's Supermarkets Inc. is also using technology to improve processes. Shaw's began looking about a year ago "to transform paper and fax processes into system- and web-based processes," explains Mike Griswold, strategic process leader-supply chain for the retailer.
"As we saw what our competitors were doing, we realized we needed to take a hard look at how we were doing things from a process and a systems perspective in order to have a cost-effective supply chain that served customers better."
Shaw's serves more than four million customers each week through its 186 stores in the six New England states. A wholly owned subsidiary of the United Kingdom's J. Sainsbury plc, Shaw's operates a distribution network that includes a perishable distribution center in Massachusetts and a DC in Maine that serves the frozen and dry grocery needs of a sub-set of stores. The remaining stores are provided frozen and dry groceries via a wholesaler, which also supplies Shaw's dairy products.
As part of its network restructuring, the regional supermarket chain is using tools from i2 Technologies "to help us better understand the relationships between the stores and the distribution centers, to more efficiently align them," Griswold says. In addition, the i2 products have enabled Shaw's to optimize transportation between the distribution centers and stores.
Shaw's is moving to automate its inbound produce logistics operations by initiating phase one of a hosted, web-based collaborative transportation management solution from Charlotte, N.C.-based Elogex, which provides complete IT platforms for collaborative logistics.
"We post to our carrier network the loads that we need to be picked up, and their destination. Carriers see the loads, and confirm that they have the necessary capacity, then we agree on the move," Griswold explains.
The collaborative transportation tool has the potential to help Shaw's eliminate empty miles by dynamically creating continuous move routes. For example, if a carrier bringing strawberries from California to Shaw's can find a load nearby to haul back to California, "that's a win for the carrier that enables a better rate for us," Griswold notes.
Once the inbound loads are tendered, Shaw's dispatchers will have visibility of logistics events via proactive alerts to a browser, personal digital assistant (PDA), or mobile phone. That visibility is important to Shaw's.
"If we expect 100 cases of strawberries from California, we need to know if they aren't going to make it, for we have demand to fill," Griswold says.
Increased visibility and alerts mean that, when problems occur, Shaw's buyers will be able to make arrangements with local markets to ensure the demand can be met.
"Most of our perishables come from outside New England," Griswold says. "Understanding how that product is moving, and being able to quickly resolve the receiving process, means that we'll ultimately be a better partner with our carriers and a better food retailer for our customers."
ES3 Co-Locates Inventory to Serve Customers
Technology is a major differentiator for ES3 LLC, a channel-neutral supply chain services firm dedicated to the food industry. ES3 (an acronym for Efficient Storage, Shipping, Selection) expects to be able to deliver multi-manufacturer consolidated orders to customers throughout the Northeast and Midatlantic regions within 24 hours, thanks to its state-of-the-art mega-distribution center in York, Pa., where it will co-locate inventories of multiple manufacturers.
"Our vision is to become the high- service and low-cost supply chain conduit between the manufacturers, distributors, and retailers in the grocery industry," says Geoff Davis, executive vice president for the company. ES3, a sister company of C&S Wholesale Grocers Inc., is headquartered in Keene, N.H.
Technology, including electronic information exchange (EDI, XML or direct machine-to-machine communications) and automation, will be a key enabler for ES3. For example, the company recently selected a hosted solution from Elogex as its platform for inbound and outbound transportation activities. Manufacturers and their customers will have real-time visibility to inventory and the ability to monitor shipments end-to-end.
A 400,000-square-foot portion of the new high-rise distribution center—which has 110-foot ceilings—holds 140,000 pallet positions, giving it the capacity of a 1.2-million-square-foot conventional warehouse. When completely built out, the entire ES3 facility will hold a total of one million pallet positions and occupy about 2.2 million square feet.
ES3 decided to go high to reduce travel time, according to Davis. The DC uses 15 robotic cranes to access the racks, enabling high levels of throughput in a small footprint.
To keep track of trailers in its 75-acre yard, ES3 has tagged each trailer with a small Real-Time Locating System (RTLS) tag that's part of a WhereNet real-time wireless location system. The system interfaces with an internally-developed warehouse management system, and is linked to the company's transportation management system, which transfers data to the Warehouse Management System. This enables notifying the DC of scheduled dock arrivals, so that lift trucks can meet incoming loads at the dock doors.
"Right now, we're turning doors in the range of 20 minutes to an hour for palletized loads," Davis says. "When the site is built out, there will be 1,900 truck slots. They'll move rapidly, and in tight time periods."
Thanks to WhereNet's yard management software and wireless location applications, "we can optimize every yard move we make from the moment a trailer enters our distribution center," he says.
And that's important. Because of the delivery time E3 promises retailers, trailers need to be tightly scheduled so that there is no time wasted moving the right trailer to the right dock door at the right time.
Unique Challenges of Food Logistics
While food logistics is similar in many ways to logistics as a whole, there are some important differences, notes Ann Elliott, president and CEO of Atlanta-based Solertis. She and consultant Jesse Laver cite the following differences:
Safety. Conagra's recent voluntary recall of nearly 19 million pounds of ground beef graphically illustrates one of the critical differences of food logistics. Whether the concern is potential terrorist attacks on the food chain or outbreaks of the e coli virus, the safety of food products is at all times the overarching priority for food logisticians.
Freshness. "Even packaged product has a fixed shelf life," Elliott notes. Maintaining FIFO (first-in, first-out) and avoiding dating issues requires discipline, rigorous processes, and a good system. "But no matter how good your system is, there's still a discipline issue," Laver explains. This requires adherence to top-notch processes and rigorous quality standards.
Temperature variations. Add to the challenges of safety and freshness the complexity of managing facilities that have ambient, refrigerated, and frozen capabilities. "It takes a unique group of people to work in a frozen facility," Laver says.
Brand image and identity. "When a company spends tens of millions of dollars promoting its brands, they have to be aware of the negative consequences of consumers seeing stale or damaged product laying in the back corner of the store," Elliott says.
Finally, Laver points out, while some food products have higher margins, many others have very low margins. Low margins coupled with increased competitive pressures mean that wringing every excess dollar out of the food chain becomes crucial—so we can expect to see even more collaboration and creative use of technology in the years to come.
Logistics a Core Competence For McLane Grocery Distribution
Despite all the gloom and doom about disintermediation, the food wholesaler's job is just as important today as it has ever been, notes Robbie Wainwright, vice president of logistics for McLane Company Inc.
"Wholesalers provide a vital link in the supply chain," he says. McLane, a 108-year-old company and wholly owned subsidiary of Wal-Mart, is a multi-faceted wholesaler based in Temple, Texas. "We provide goods and services, and merchandising support," he says. "Logistics is a key component of the service we provide. Timely delivery, accurate orders, and superior execution—that's what we live by."
McLane has separate business units for grocery and foodservice distribution. The foodservice unit, headquartered in Carrollton, Texas, serves national and other accounts through 18 foodservice distribution centers, and is a centralized operation. Management of the grocery distribution unit is decentralized.
"In grocery distribution, a significant portion of our customer base is regional chains and local market chains," says Wainwright. "By utilizing a decentralized leadership approach in this business unit, we feel we can better respond to and anticipate the local market needs of this customer base, while the concept of Best Practices and some central logistics applications provide the consistency required for customers served by multiple grocery divisions."
The head of each of the 19 grocery distribution divisions is a president in charge of local operations, including the DC as well as transportation, merchandising, sales, accounting, and human resources.
All of McLane's DCs are company-operated, for McLane views logistics, including warehousing, as a core competence. "We control the service we provide to our customers through the way we execute operations in our distribution centers," Wainwright explains. "We want to keep very tight control over it, so we would not outsource it."
McLane's logistics function serves both grocery and foodservice distribution. "We attempt to integrate certain components, such as transportation and traffic management, some joint merchandising initiatives, and common construction management when we do facility design," Wainwright says.
The wholesaler's distribution centers use a blend of high-tech and manual processes. "We use some voice-directed technology, some pick-to-light and put-to-light, RF, automated bar coding and sortation systems," the vice president says. "It's a mix. We have some highly automated functions, and some traditional manual functions.
"It comes down to tailoring the best technology to the specific solution. We try to apply automation and technology to where it serves our needs and our customers' needs the best. But we're also not afraid to use a manual process if that seems to be the best fit."
McLane's DCs use standardized processes and practices. "We go through a best-practice methodology, and develop the best process for certain functions across the company," Wainwright explains. A central engineering team that's part of the logistics unit develops engineered standards and implements standard technical solutions in all of McLane's operating units.
"We try to keep consistency—our customers want to see the same service across all of our operating units," he says.
The logistics function provides centralized routing for all of McLane, Wainwright explains, producing effective and efficient routes and maintaining a centralized database. The company recently implemented on-board technology and satellite tracking throughout its private fleet.
The logistics unit at McLane is constantly seeking ways to improve its operations. "We're never satisfied with the status quo," Wainwright says. Keeping up with McLane's customers requires "continuously reviewing our processes internally, evaluating our tool set and keeping it updated and current with the needs of our customers."
Key fundamentals to the company's overall strategy are "providing the lowest cost, having great in-stock position, implementing the best technology, and providing flexible service," Wainwright says.
Delivering these components will help McLane achieve a lofty goal: "We want to become the world's premier logistics company by providing our customers the best services in the most efficient manner," he says.
Logistics Soars at Giant Eagle
Giant Eagle Inc., a regional supermarket retailer headquartered in Pittsburgh, Pa., has refocused its logistics efforts on what it calls Bottom Line Logistics.
"Before we embraced Bottom Line Logistics, we had a traditional silo approach, with procurement folks making their decisions, logistics folks doing their thing, and distribution doing theirs," explains William Parry, vice president of logistics for Giant Eagle.
Today, the company makes decisions from a total corporate perspective. "If it means spending more money in logistics to serve retail stores the right way—so that they can better serve their customers—that's what we'll do," Parry says. "If we have to change from purchasing truckloads to less-than-truckloads to better manage inventories, that's what we'll do."
Giant Eagle's logistics operations started from scratch in 1995. Today, it includes a senior vice president of distribution/logistics, a vice president of distribution (who has responsibility for Giant Eagle's five distribution centers), and Parry, who oversees the retailer's transportation functions.
One of the first initiatives undertaken through Bottom Line Logistics was buying a transportation planning tool from Manugistics. "It helped us get off the ground with planning our transportation resource needs," Parry notes. "As we got more sophisticated, we understood how important it is to evaluate cost based on the entire supply chain, rather than on silos."
As part of its continuing effort to improve operations and private fleet effectiveness, Giant Eagle moved from decentralized to centralized management of outbound transportation four years ago.
"With five DCs, historically we had five different transportation managers and five different transportation plans. Now we have one transportation unit working from a central location in Youngstown, Ohio." Giant Eagle has 124 corporate and 88 independently owned and operated stores throughout western Pennsylvania, Ohio, north central West Virginia, and Maryland.
The centralized transportation unit makes routing decisions and dispatch arrangements for each facility. The centralized arrangement pays off in a number of ways, including the ability to procure power units from a single vendor, implementing a standardized maintenance reporting system, and moving to an automated fueling system.
Inbound transportation is also getting a makeover. "On the inbound side, from a supply chain management and corporate strategy viewpoint, we've been working for some time on changing our processes and strategies," Parry says.
About two years ago, Giant Eagle began looking for a solution that would enable it to gain supply chain visibility of inbound shipments, regardless of whether the retailer or its vendor routed the shipment. In June, the company selected G-Log's GC3 application, a logistics platform that combines transportation optimization, execution, planning, visibility, event management, and freight payment. Parry says the company expects to achieve a return on its investment in 15 months.
"One area that will impact ROI the most will be our ability to increase the amount of purchase order work we can flow through the system daily," he says, enabling the transportation unit to handle its growing business without adding staff. In addition, "we believe our logistics analysts, working with our procurement team, will use this tool in conjunction with other supply chain processes and software to come up with the best bottom-line solutions," Parry notes.
Giant Eagle expects to complete the first phase of its implementation—which includes the complete logistics process of dry grocery from purchase order creation to delivery at their DCs—in less than 100 days from the initial kickoff meeting in late July. Next to come are dairy and frozen products, with fresh produce freight and imports to follow.
Giant Eagle is making great strides in overhauling its logistics and supply chain operations. Parry traces much of its success to commitment from top management and throughout the organization to follow the new strategy. "You can have the best technology, plans, and strategy in the world, but if you don't have that commitment, you won't be successful," he says.