September 2004 | Commentary | Viewpoint: Logistics & Supply Chain Analysis

Maintaining Profit Margins in Food Service Distribution

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Inbound freight programs, onboard computers, computerized routing systems, warehousing management systems, real-time radio frequency, incentive pay programs, global positioning systems, activity-based costing. What do these have to do with food service distribution? The answer is everything.

Food service distribution is a highly competitive industry with relatively low margins. Many refer to it as "a penny business" because for every dollar of top-line sales, only a few pennies trickle to the bottom line. To compete successfully in such an environment, food service distributors must continuously drive inefficiencies out of the supply chain.

The Customer is Always Right

Compounding the economic implications of the business are customer expectations. Simply put, customers want what they want, when they want it, at the agreed-upon price. Distributors who can dependably meet these expectations improve their market share, but those who do not often find themselves struggling to compete.

Food service distributors are increasingly aware that in order to serve customers better and to keep prices low, they must have efficient processes and effective tools in place to control and analyze costs.

Because warehousing and transportation are the highest costs on the logistics curve, and because their level of performance immediately impacts customers, these areas of the business are often primary focal points for improving operational excellence.

For this reason, food service distributors across North America are investing millions of dollars in new and improved systems and programs. These include:

  • Activity-based compensation programs for warehouse workers and drivers that are designed to drive order accuracy.
  • On-board computers for fleet management to track on-time delivery performance.
  • Enhanced warehouse management systems to track inbound and outbound product throughout the supply chain.
  • Activity-based costing models to accurately measure the true costs of handling various types of products.

An efficient supply chain requires accuracy at all levels. Buyers must accurately order product to ensure that there are no out-of-stocks or excess inventories. Distributors, whose customers demand 99.9-percent order accuracy, must have that same level of accuracy from their suppliers. Warehouse personnel must accurately receive, store, and select product for delivery. Drivers must monitor their loads accurately to ensure that customers receive the correct items in the correct quantities.

One mistake creates a domino effect that is costly for all. Product that is ordered by a distributor but does not arrive on the scheduled inbound delivery creates re-orders, out-of-stocks, and poor service. Product that is ordered by a customer but is not delivered correctly can create returns, re-ships, dissatisfaction, even loss of business.

Helping customers understand the economics of distribution is another approach many distributors are taking to help reduce customers' costs. Sales representatives are helping customers understand that special-ordered product, frequent deliveries with small order quantities, limited time windows, and manual order processing require a large amount of support and increase costs.

By working together, they are changing past practices to improve service levels and reduce costs.

Streamlining Logistics

For the food service industry, logistics is the feat of getting millions of tons of widely varied food and related products from every corner of the world to the right restaurant or foodservice operator. Food distributors do this every day of the year with speed, accuracy, and agility.

Logistics neither makes nor sells product. In many ways, it is primarily a customer service. As one veteran sales rep once said, "Sales gets the business, but logistics keeps it."

Distributors who make logistics a fundamental part of their business strategy serve their customers better and keep their prices low.

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