LOGISTICS TODAY: How do you characterize Kroger’s supply chain?
HESCHEL: We look at it as a complete end-to-end flow, all the way from the point of manufacture to the consumer at the front end. We didn’t do that in the past so much, and what happened is, you get into a situation where you do things at a distribution center that might not be good for the store, like for example, putting together pallets that the store has to tear apart and reassemble so they can go out into the aisles with it to stock the shelves. So we now look at the supply chain as an end-to-end flow.
We have a supply chain council, as a matter of fact, which shows you the level of importance, and the mission of that council is to look at all aspects of the supply chain, and then determine what kinds of best practices and other things we should be doing and continue to do to lower the cost of our supply chain along with improving the service.
Also, our long-range plan identifies managing our supply chain as one of the key elements of success in terms of Kroger for the future. So it gets a pretty high visibility.
LT: Describe Kroger’s three-tiered distribution system.
HESCHEL: One of the tiers is direct store delivery of certain items. We also have the classical distribution center tier, where items come in from the manufacturer to a distribution center relatively local to a region that has 100 to 200+ stores. That distribution center is responsible for replenishing those stores, and it tends to be higher volume, faster moving stuff, some of which is crossdocked. Then you have another tier which is the slower moving products as well as our self-manufactured products.
LT: What’s your background and how did it prepare you for your current role?
HESCHEL: I started at Kroger in 1991, and before that I was with American Hospital Supply from 1975 to 1991. At AHS I was responsible for providing all the technology, telecommunication networks and support for the hospital supply and scientific lab supply divisions logistics organizations, as well as MIS for the entire company – that being everything other than logistics as well. Not only did we have a lot of technology projects, we also had business consultants that did a lot of the supply chain work in terms of helping divisions because divisions were more service oriented and they really didn’t have much analytical capability in that role because we had had it centralized. So I was used to a lot of distribution through AHS, and then Baxter when they bought AHS.
LT: What are Kroger’s current efforts in terms of improving or streamlining its supply chain and logistics processes?
HESCHEL: We’re doing a lot of the things that you would expect, like vendor-managed inventory. In conjunction with that, we have something we call short cycle time, which is taking a look at the supply chain process and seeing there are steps that seem to take longer than make sense, and then cutting those out.
We have a web-based transportation network that we started with Schneider Logistics and then took on our own in terms of inbound freight and routing of trucks and so forth. We have a software system on the web that allows us to do that. And then we have regional transportation centers for managing our inbound and outbound freight delivery to our stores.
Also, within the four walls of the distribution center we are looking very heavily at how we can cut costs by selective use of automation. We’ve driven costs out of our system over the years, but you get to a point where you’ve got to begin to make significant changes in the process if you’re really going to go into a new round of efficiencies. So we’re looking at how we can automate the case and piece picking processes that we have. I don’t mean that we’ll get rid of every person and have a lights-out place, but where we can be more efficient or in some cases selectively replace labor.
LT: Is Kroger looking to follow the lead of Wal-Mart and now Albertsons in RFID?
HESCHEL: I’ve been on the UCC board of trustees for quite a period of time, and I’m very familiar with what’s going on there. The EPC division is basically trying to do the same thing that was done with the UPC code a number of years ago, so they’re coordinating the standards and the installs and so forth because one or two companies shouldn’t be driving this thing – it has to be industry driving it because you’ve got to have standards.
In my observation right now RFID is not a mature capability because not only is it somewhat costly but the technology around it is not what it should be, and I don’t mean just from a cost perspective, I mean from an operational perspective. In fact I’ve visited a number of suppliers, and none of them have been able to cost justify RFID yet in their manufacturing and distribution operations. It’ll come as the costs come down and so forth.
So yes, we’re looking at RFID. We’re trying to see where we would get the biggest bangs for the buck and how we should start it, and then of course we’re watching Wal-Mart very carefully because I really do believe RFID will revolutionize the whole logistics process. Think about it – a product now has a small brain. It’s not a very smart brain, but that’s okay. We’ve talked to Procter & Gamble and Gillette and different companies to see how we can move forward with this. So we’re in the evaluation phase of it, but I think it’s got a lot of promise.
LT: What is the biggest logistics or supply chain challenge Kroger faces today?
HESCHEL: Labor costs. We’re heavily unionized, and not only in the retail but also in the distribution business it’s a competitive disadvantage against Wal-Mart. There’s no question about it, so we’ve got to get our labor more productive and also automate where we can so we can continue to be competitive. That to me is the biggest challenge we face.
Another challenge is to fully integrate the supply chain. All of us talk so much about it, but to fully integrate everything from the manufacturer and supplier all the way through, – including your own manufacturing – and really get a smooth supply chain flow without a lot of bumps and a lot of delays, that’s going to take a lot of coordination.
LT: What can you point to as Kroger’s greatest accomplishment in terms of its supply chain?
HESCHEL: In the mid-1990s it would be the three-tiered distribution system I mentioned earlier – it really helped us a lot. Not only did it help us lower costs, but it also improved our service dramatically, and that resulted in our not having to invest so much in a lot of the local distribution centers within the regions because we had five central operations.
I think that our success in the merger with Fred Meyer Inc. was a significant accomplishment in all terms of the business, including supply chain. We had to swallow a 40% increase in volume and sales, and when you’ve got a complete different culture and a completely different logistics network and supply chain, integrating those two is not the easiest thing in the world and we’ve been able to accomplish that.
Michael Heschel
executive vice president – information systems and services
Kroger Co. (www.kroger.com)
