Food Distribution: Back to Basics

Survival in this ultra-competitive industry requires a fresh focus on the fundamentals.

Whether it’s skyrocketing material costs, out-of-control SKU proliferation or strict regulation, every industry has an Achilles’ heel. If ignored or mismanaged, vulnerabilities in one link of the chain can wreak havoc on the entire system.

And, economic conditions aren’t making things easier. Supply chain resiliency in nearly every industry is being put to the test.

However, when you supply product for human consumption, you face some of the most complex distribution challenges imaginable. That’s why you’ll often find the most innovative, leading-edge technologies and processes in the pharmaceutical and food distribution markets.

For foodservice and grocery distributors, 2008 was especially cruel. High-profile food recalls, rising commodity costs and diminishing consumer demand took heavy tolls on an industry that struggles, even in good economic times, with razor-thin margins.

For every dollar of revenue, food distributors make an average of 1.8 cents of profit, according to Steve Potter, senior vice president of industry relations at the International Foodservice Distributors Association (IFDA). “That means they have to sell more than $50 of product to get one dollar to the bottom line,” he says. “In an industry like that, the key to success is efficiency. Distributors are tightening their belts, going back to basics and focusing on accuracy.”

This focus on fundamentals was a key theme at the IFDA Foodservice Distribution Conference and Expo in Pittsburgh last October. During a panel discussion at the conference, Jeff Braverman, president of Iowa City, Iowa-based Hawkeye Foodservice Distribution, said: “We have been doing a lot of belt-tightening moves as our industry consolidates, and we all get better at what we do.

“I don’t see any magic bullets,” he added. “One thing that I think will make this economic time different is that there won’t be as much margin for error. There is no margin for error for misallocation of resources or if you do things that are not good business practices.”

Accuracy is King
Some would expect less access to capital and sagging consumer demand to result in delays or cancellations of technology and automation investments. That’s not the case with food distributors.

In fact, Potter says astute distributors are continuing to invest in technology because they need information to make smart decisions. “The best in class are gathering and using data, establishing performance measurements to understand and control costs and using data to improve accuracy and operational performance,” says Potter.

He sees food distributors continuing to implement voice recognition and inbound, warehouse management and transportation routing systems, among other technologies. However, he emphasizes that leading distributors aren’t just throwing money at bad processes.

“You can spend a lot of money on technology, but if you haven’t improved your processes, you won’t get return on investment,” says Potter. If a warehouse is not slotted properly, for example, and travel times are excessive, a high-tech warehouse management system will have little benefit. “The warehouse has to make the change in slotting so the data and performance complement each other,” Potter says.

Receiving is just one area food distributors are targeting for process improvement. At the IFDA Conference, Braverman said his company is focusing on scanning accuracy on inbound to identify errors faster and get more accurate data to suppliers.

Accuracy at all points in the process is taking on greater importance. Mike Roach, president of Ben E. Keith Foods in Fort Worth, Texas, explained that his company benchmarks shorts, mis-picks, sales errors, customer errors and other problems every week and sends reports to the company’s six branches. “By benchmarking that, and really by rewarding our operations people, incentivizing them to have continuous improvement in all of those areas, that helps quite a bit,” said Roach.

“We tend to focus on what we can do within our four walls,” said Mac Sullivan, chief executive officer of Goldsboro, N.C.-based Pete Dawson Co. at the IFDA Conference, “to reduce the number of errors, whether it’s barcoding at receiving, putaway or letdowns.”

One seemingly minor error can have a disastrous domino effect on operations, Potter explains. “An eightstep process done correctly is a 24-step process done incorrectly,” he says.

“A one-ounce error in item weight can equal three pounds a case, 120 pounds a pallet and 4,800 pounds a truckload,” he continues. “It’s all the little things. A half-inch error can equal an error of 1,000 cubic feet on a truck.

“The distributors that are successful today sweat the small stuff,” he adds.

Across the Food Chain
Potter says, on average, food distributors must maintain a 99.9% accuracy rate. “Any less than that and they risk losing business,” he says. However, maintaining that low error rate is tough when inbound shipments from manufacturers are only 90% accurate. “There is a big gap there,” he says. “We are working to fill that gap.”

That’s where a renewed focus on collaboration is entering the picture. “Distributors are working with manufacturing partners to remove inefficiencies,” Potter says. “Creating a culture of continuous improvement is more important than ever.”

At the IFDA Conference, Sullivan explained how it works. “We measure our vendor’s performance, so that we look at their service level on cases delivered, we look at their on-time delivery, and yet it has been difficult to get our vendor partners to understand how their inefficiencies in delivering to us affect the entire supply chain.”

One of those inefficiencies is the need to carry large amounts of safety stock. Sullivan said his company’s service-level goals for its customers are at 98% to 99%, yet inbound from manufacturers ranges from 85% to 92%. “All that adds tremendous costs throughout the supply chain,” he noted.

Roach said Ben E. Keith Foods educates suppliers about increased costs that result from missed time windows or incomplete orders. “We are working with our manufacturer partners to provide them with instant and accurate data on what they are delivering to us, whether they are hitting their time windows and whether their orders are complete,” he said.

“The traditional relationship with manufacturers has always been at a sales level,” Roach added. “Those days are gone. We have to have a complete understanding in this industry of what impact each of us has as members of the supply chain on the total cost to other members, and that is what collaboration is all about.”

Track and Trace
Going back to basics inside and outside the four walls is even more important as food distributors face increasing pressure to track and trace product effectively throughout the supply chain.

Last year was filled with highly publicized food-related scares. Tainted tomatoes caused illnesses in more than 1,400 people and led to the recall of massive amounts of tomatoes. When the FDA cleared tomatoes as the cause of the salmonella outbreak and instead placed the blame on peppers, the media pointed a disapproving finger at the flaws inherent in the food supply chain.

Iceberg lettuce took its turn as the food to fear, and in September, tainted dairy products reportedly led to the deaths of six infants and caused illness in 294,000 children.

These events turned up the heat on existing tracking and tracing initiatives. So, in October, 34 companies from the produce supply chain publicly endorsed a previously developed effort called the Produce Traceability Initiative (PTI).

Sponsored by the Produce Marketing Association, United Fresh Produce Association and the Canadian Produce Marketing Association, the PTI aims to establish a common standard for electronic, case-level produce traceability by the end of 2012. The plan calls for a standardized system of barcoding for all produce sold in the U.S. The 34 companies that endorsed the plan are members of the PTI’s steering committee, which was established in late 2007.

The initiative builds on food companies’ existing tracing systems with international standards from the GS1 organization. The goal is to allow external traceability by standardizing two data sets: a Global Trade Identification Number (GTIN) and a lot number. A GTIN is a globally unique, 14-digit number that identifies the brand owner and type of product, while the lot number identifies the lot or batch from which the produce originated.

Currently, GTIN is used in barcodes, but it could also be used with RFID. The information would be placed on labels on each case in human- readable as well as barcode form.

While compliance is voluntary, most food industry leaders expect buyers to request compliance from suppliers and some companies to use the initiative to reduce potential recall costs.

If the PTI becomes an industry standard, food distributors will have yet another detail to manage, and those that control those details now will be better positioned later.

Others will fall behind. “We will lose some companies as they are shaken out,” predicts Potter. “Distributors with tight operations, innovative thinking and a focus on helping customers will weather the storm. Success means doing a lot of little things right.”

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