Managing Complexity While Reducing Costs

For the past 15 years, the food industry has made a concerted effort to reduce inventory, increase response time, minimize errors and otherwise optimize performance. Have these efforts to streamline the supply chain paid off? What role has technology played?

Food Logistics recently posed these questions to a diverse group of industry executives to get their take on the technological progress that has been made, and what they foresee for the coming decade.

They represent a wide range of viewpoints, from executives who have led supply chain operations for major multinational conglomerates to a small, boutique manufacturer of organic garlic products, as well as a large specialty foods wholesaler and a fasts-growing foodservice distributor.

Robert Nardone, currently an executive associate with consultant Tompkins Associates, has 35 years of operations management experience in the consumer products industry with companies like Unilever, Bestfoods, Nabisco Brands and Colgate Palmolive. He last served as vice president of supply chain integration for Unilever NA.

Brian Chossek is president of Seven Oaks Ranch, an integrated organic food company founded in 2003 that operates a 12.5-acre organic ranch, manufactures the Garlic Gold line of organic food products and operates ShangriLa Gourmet a natural foods cafe. Prior to launching Seven Oaks Ranch, Chossek actively consulted to a variety of companies, including start-ups and those undertaking reorganizations, serving in roles ranging from president to vice president of sales.

Chris Sieberg is vice president, transportation, inbound and outbound, for Tree of Life, a $1.2 billion distributor of natural, organic, specialty, ethnic and gourmet food products with 10 DCs serving the entire U.S. and Canada. Prior to joining Tree of Life, Sieberg filled a similar role with Maines Paper & Foodservice.

Jay Gavigan is vice president, IT director, with J. Kings Food Service, a Long Island, NY-based foodservice distributor that has more than doubled in sales since he joined the firm to overhaul its IT operations eight years ago.

What have been the food industry’s biggest successes in its efforts to streamline supply chain operations over the last 15 years? Where has your company achieved significant improvements?

Nardone: There there certainly have been incremental successes associated with business processes and technology related to operational transactions, that is, everything that takes place in the order-to-cash cycle, from order processing and inventory management to order status tracking and cash collection. Much of that is due to companies putting in their big, powerful ERP systems over the last decade or so, along with big improvements in warehouse management and transportation management systems, all of which have created operational and customer service improvements.

You can find some good indicators of that improvement. For example, an order cycle of five to six days used to be the norm. Now I believe the last statistic I saw was two to three days, and if you really want to secure a competitive advantage, it’s 24 hours.

Also, if you look closely at the last 15 years’ of data, you’ll find that inventories really have decreased. This can be hard to see for several reasons, but in aggregate, inventories are lower than they were 15 years ago, thanks to better planning and better inventory management. I know this is a sore point with a lot of manufacturers, because from their perspective inventory levels have remained flat or even gone up, in some cases because retailers have pushed inventory back to suppliers. But if you look at total inventory in the supply chain, and the fact that supply chains have lengthened with globalization, there really have been improvements.

By the same token, not everyone has seen the level of operational cost improvements they may have hoped for, but this is largely because of the huge increase in complexity compared to 15 or 20 years ago.

If you take into account the complications that have been added by the multiplication of and differentiation among trade channels, global sourcing, the proliferation of SKUs, and in the last couple of years especially, increases in transportation costs, you realize that all these factors make it hard to see the improvements.

Actually, one of the indicators of the industry’s success in improving supply chain logistics over the last several years, is the fact that companies have been able to manage all this added complexity in their business while holding down costs. Just for costs to remain flat given all these changes, would be an amazing accomplishment and sometimes we fail to give ourselves credit for this.

Chossek: The biggest improvements for us are all around visibility. We work with so many of the bigger retail chains and distributors, even though we’re a small company.

Before, as a small manufacturer, it was darn near impossible to get visibility into where our products were going. But in the last few years all of the major distributors, it seems, have developed portals that allow you to see where your products are moving every month. This enables us to understand what’s working, what’s not working, and what we need to promote.

When we started this company five years ago, that data was very difficult to get. We might have a good month, but we had no idea where that product went. Forecasting demand was an incredible challenge, because we had no visibility into where our product was ending up. It was very difficult to manage promotions, and to make sure product was actually leaving the supermarket shelf.

In the last two to three years, the growing practice by distributors of providing this data to us any time, via internet portals, has been extremely useful.

Sieberg: At Tree of Life, the biggest improvements have come through a concept we started deploying in 2005, which involves opening up our books to customers on how our pricing is developed. We’re doing menu-based pricing: we start with our basic product cost, then layer in different types of services the customer is looking for, so the customer has visibility into where costs are being added to the supply chain.

When we started, a lot of retailers didn’t really want any part of it. By after a year or so, we started to see RFPs coming in employing these same concepts. It’s a win-win, because getting customers to partner with us in addressing how they drive their own costs has really helped us work together to make our combined supply chains more efficient. This has been the most transformational change in our supply chain practice, because it involves changes that cross beyond our organization.

Operationally, one of the main things we’ve concentrated on is enhancing value per transaction. Historically, customers say they need a delivery every day. When they realize that adds 3 percent to the cost, they reconsider and might instead request twice weekly. Then if they can give us a 24-hour delivery window, they can take another 0.5 percent off.

Internally, we’re finding success with our implementation of four regional consolidation centers. When we simulated it, we thought we’d save $2 million a year. We’ve outperformed that by 50 percent, because we’re shipping more volume into those regional centers than we’d projected. They’re allowing us to fill out inbound trailers, which lets us deal with different types of carriers.

Gavigan: For us, one of the biggest changes to help streamline our operation is the use of EDI for purchasing, both for inbound and outbound P.O. transactions. Since I first arrived at J. Kings eight years, ago, the volume of orders coming in every day has tripled. More than two-thirds of those orders now come in electronically, which is probably three to four times the proportion that were coming in electronically back then. The impact is we’ve been able to hold the size of our inside sales department basically steady while sales volume has doubled.

What technologies have provided the most support or impetus to improvements in supply chain operations, in the industry in general, or in your organization specifically?

Nardone: The ability for trading partners to exchange data, through all the capabilities associated with standard EDI transaction sets, has certainly helped with accurate order management and tracking. Systems that have been developed to manage continuous replenishment and vendor-managed inventory have also been a success.

Although they sound like old news, because they were first developed in the ’70s, the way UPC codes have been used in the supply chain over the last 15 years has also significantly improved operations, specifically their use in warehouses and transportation to scan and track inventories and product movement has helped inventory accuracy and order accuracy.

More recently, in at least some organizations, improvements in the use of point-of-sale data beyond category management applications, for activities like dynamic forecasting, is gaining traction. This further extension of visibility into inventory, right to the store shelf, is allowing companies to do a better job adjusting their supply chain response.

Chossek: When we first started five years ago, all we had was a financial accounting system that was the equivalent of Quickbooks, and the rest of our inventory management was being done with paper and pencil. Now, with Smart Turn, our on-demand enterprise and warehouse solution, we have software that’s more robust in its ability to handle inventory and kit products.

We’re using it for all warehouse management functions, incoming and outgoing, which formerly were handled with about five different pieces of software. It’s eliminated a significant amount of data entry, and given us significantly more information we can use to manage our business.

Ten years ago, we wouldn’t have been able to do what we’re doing the way that we’re doing it—the capital costs to maintain these kinds of software capabilities would have required a whole different way of operating. Whereas now, any start-up with a few smart people and a couple of good application service providers can be part of the game.

Gavigan: The big difference for us was when we rolled out our integrated ERP and WMS system from Retalix. Before that, we had a tough time just finding inventory in the warehouse.

Since then, we’ve added a bunch of other systems, some of which integrate very well with the enterprise and warehouse systems, others that are just add-on packages. We now use voice picking, sales automation, advanced purchasing and forecasting, Roadnet routing and MobileCast real-time vehicle tracking for our delivery trucks.

On the demand planning side, we used to do all ad hoc reporting. If a school was closing, we’d get a list of what they bought, how much by week, take that report and go into the purchasing system to try to tweak P.O.s to get the desired result.

Now all the demand and forecasting data is available online at the touch of a button. You go into the demand screen and can see four weeks forward from any point, for this year or last, or remove or add in a customer, to see the impact on demand.

Some of these applications have been surprising with their ROI. We’ve gotten phenomenal feedback on the Mobilecast application, for example, which lets our customer service people tell customers exactly where their delivery truck is at any minute, and from voice pick in the warehouse, which particularly for handling catchweight items has probably saved us two bodies on the night shift, while also helping to decrease mispicks.

Sieberg: Looking back over a 10-year horizon, various kinds of optimization tools have made the biggest difference for us, for example transportation optimization tools, and our E3 buying system. Because our average order size, even inbound, is very small—typically in the 3,500– to 5,000-pound range—we were historically shipping a lot of LTLs. With freight optimization tools we can build multi-stop truckloads, which has saved about 15 percent in freight costs.

More recently, over the past three and a half years, we’ve been centralizing certain functions with the help of these tools, because you no longer have to be in the same office to be able to look at the same things. We’ve gone to a matrix organizational structure, where all inventory management reports go to the vice president of inventory management, all transportation reports to the vice president of transportation, the same with warehouse, because we have visibility across all our DCs with tools like JDA Transportation, and our warehouse management system, which is the backbone.

This has also allowed us to develop a buying department where buyers focus on point of origin. So each only has to be familiar with 100 different vendors within a certain market, but they all feed into 10 different DCs. That led us to the supply center concept we started in 2007, and we’re not quite there yet, but we’re evolving into a situation where we’re developing supply centers for slow moving items, close to their vendor base, with weekly replenishments to our DCs that are not tied to any minimum order quantity. This way we can reduce spoils while improving customer service.

These types of operations would be extremely complex to do manually, but our buying systems enable us to manage our supply center as if it were a vendor feeding our DCs.

In what areas has progress on supply chain optimization moved more slowly than you’d have anticipated?

Nardone: If you look back at Efficient Consumer Response and its promises to create all this extra value, the results haven’t come as fast as anybody expected for a number of reasons. One was all the merger and acquisition activity, which got everyone focused internally instead of externally with trading partners. That was a distraction. Then there’s been the huge increase in business complexity, including SKU and trade channel proliferation, globalization and outsourcing.

Initiatives like collaborative planning, forecasting and replenishment (CPFR) have not delivered as expected, their gains reduced somewhat by these business issues. You also still see some reluctance to collaborate among a lot of companies.

In at least some quarters, though, this barrier is starting to break down. In the last three to four years I’ve seen some big improvements in collaboration, not with everybody, but at least with key accounts. You can’t be everything to everyone, but you do see companies starting to form alliances in different trade channels, focusing on partnerships and putting in the resources to field customer-focused teams, so the trust issue around collaborative activities has, in recent years, vastly improved.

Even within companies, some are still struggling against the silo effect. Aligning all an organization’s activities around the same objectives is still a huge challenge for many enterprises. Here, one useful tool that’s starting to gain traction is sales and operations planning and execution software. If you use this sort of technology to drive a really sophisticated sales and operations planning process, it becomes a powerful integrating factor enabling businesses to get all their activities aligned.

Given the fact that so many improvements in logistics and order management are highly dependent on data accuracy, I also would have thought efforts to improve data synchronization between trading partners would have moved faster by now. Some people have gotten on board, but progress has been a little slow.

Sieberg: Where we’ve so far fallen short in the food industry is the lack of standardization, not just in data, but in business processes and operations. For example, pallet exchange is still a common practice, using lumping service is a common practice. Part of the problem is that everyone still looks at processes mainly from within their own silos, rather than looking at how to optimize efficiency overall. In contrast, railroads may not be the most efficient organizations in every regard, but certainly they have standardized a lot of processes so that containers can move from one network to another without any involvement by customers.

What do the next 10 years hold as far as new technology and systems to support supply chain optimization? What items should be on every supply chain manager’s agenda?

Nardone: The next big thing is sales and operations planning. You absolutely need to have a suite of planning systems that marries demand and supply. If you think about how many SKUs both manufacturers and retailers need to mange today, you see there’s no way to do it without significant computing power and tools that can improve both forecasting and operational execution.

As a general category, any technology or software that improves end-to-end visibility in the supply chain or provides decision support tools around that expanded view will provide big gains. The holy grail is connectivity between the shelf and the supplier. Anything that works in that space to create connectivity and give people tools to see what’s going on that’s important, is key. With how complex supply chains are today, there’s no way humans can look at everything, so you need tools to identify exceptions and help manage your response.

For this reason, intelligent alerting will also be big. This will be a feature of applications in a lot of areas, in any situation where you’re managing by exception vs. being able to track everything directly.

To this end, more integrated utilization of POS data, especially in the area of improving demand forecasting, by getting early reads on changes to your forecast, and combing that with SOP practices to mount a response, will also figure in further supply chain improvements.

Given the ever-increasing reliance on automated exchanges of data, back-office data management technologies will also gain traction. A lot of big companies, for example, are building data management organizations today, using tools like master data management systems. Senior management is starting to understand how important accurate data is in driving their business.

Chossek: Distributor portals are good today, but they still have a way to go to become as relevant as they need to be. Improvements we’d like to see range from shorter refresh times on data to more abilities for users like us to manipulate data in ways that are meaningful to us. Also, track and trace capability, from one end of the supply chain to the other, will have to improve. I’d hope that 10 years from now, I could sit in my office and on one screen, whether through a website or some other technology, see what my inventory is at every distribution point at any given time, down to the store level.

Sieberg: More people will evolve to a kind of super-regional concept, deploying more, smaller distribution centers closer to customers, serviced by larger supply centers for certain pools of inventory. Ten years from now, we’ll also see new transportation networks n the U.S. that replicate elements of today’s European networks, with third-party transportation providers delivering stops for pools of customers, the way dedicated 3PLs currently provide customized warehousing services.

Gavigan: The big issues we see coming are country-of-origin labeling and lot tracking. These are both areas where we currently have capabilities, but haven’t been forced yet to actually apply them. Capturing such data will add significant amounts of labor to the receiving process, because this information is not currently readily available from most vendors. That’s going to have to change.

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