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Food Distribution – The Supply Chain Optimization Challenge

Fri, 03/17/2006 - 10:33am
Ben Cubitt, Director in the Management Consulting practice

Food production and distribution is big business. The U.S. food and fiber system is the nation's largest manufacturing sub-sector, accounting for over 12% of GDP and 17% of national employment. And food wholesaling and distribution represents a large chunk of that - $372 billion to be exact1.

Food wholesalers serve as the distribution buffer between increasingly global food producers and the 900,000 plus food retail outlets - ranging from mom and pop grocery stores to national supermarket chains, and everything in between. As a buffer, they allow both ends of the food distribution supply chain to operate efficiently – producers can manufacture and ship their products in efficient lot sizes while operators have access to the vast array of products, but are able to buy on an “as needed” daily order pattern. The challenge that food distributors face is how to balance the demands from each end of the supply chain without sacrificing revenues and alienating loyal customers.

As a result of widespread and rapid consolidation, the industry is divided into two camps - large national/super-regional players working to realize the efficiencies and leverage the opportunities that their size offers and, the smaller local/regional organizations working just as hard to remain competitive in their traditional markets. Unfortunately, consolidation in this industry has not been translated into increased efficiencies.

To improve efficiencies, deliver customer value, and optimize operations, global producers, national and regional distributors, and retail outlets need to consider the following:

1. Evaluate Network Optimization and Vendor (SKU) Rationalization
The wave of mergers and acquisitions that swept the global food distribution industry over recent years has paved the way for significant network optimization opportunities. In an industry where over 15,000 new products are introduced annually, vendor and SKU rationalization is a key opportunity. The solution is not just cutting the SKU count, but offering customers full access to as many vendors and products as possible while maintaining a cost effective network. How many facilities should be in the network, where they should be located, what SKUs should be stocked, and what functions should be performed – are all critical questions that must be addressed. In order to meet the challenge of operating an efficient distribution network without limiting customer’s access to products, distributors are required to incorporate a multi-channel distribution approach.

2. Focus on Operational Excellence Initiatives
Buying a wide range of products in bulk and selling them efficiently in small quantities is a daunting operational challenge. Best-in-class performance means optimizing distribution center operations – from basic facility layout and design to successful deploying leading edge technologies like Labor Management Systems and Voice Picking to drive improved performance and accuracy. In addition, transportation optimization is just as critical and distributors are required to evaluate how they plan their transportation operations – from advanced route planning to inbound freight optimization. It is difficult to sustain best practices and implement advanced technology in a de-centralized organization. Centralized processes and management are critical to optimizing supply chains.

3. Improve Supply Chain Metric and KPI Systems (Dashboards)
Leading food distributors must actively pursue Activity Based Costing (ABC) initiatives that drive strategic changes in their approach to network designs, vendor negotiations and customer service policies. Having the capability to automate the collection of Key Performance Indicator (KPI) data that is both accurate and timely, and presented in a “dashboard” format allows executive management and other functional personnel to understand trends and be more proactive. This is critical to reduce costs, optimize revenue and ensure customer service. It is also critical, particularly given the amount of consolidation, to evaluate incentives based on KPIs to drive overall supply chain excellence rather than local optimization.

4. Look Outside the Industry for Best Practices to Grow the Top Line
While growth-by-acquisition has been the name of the game in recent years, there are unique opportunities to stimulate new organic growth. Distributors must look outside of their industry to benchmark best practices in customer retention and loyalty programs. For example, a well executed customer on-boarding process can reduce customer “churn”, improve loyalty, and significantly improve satisfaction.

Other “best practices” from outside the industry include:

• Use of “self-help” channels to enhance customer experience as well as drop operating costs.
• Tiered service levels based on different segments, ensuring high-value customers are treated differently than others. The “80-20” rule typically applies where 80 percent of your revenue comes from 20 percent of your customers. Adhering to the “best customers best” philosophy can be applied to operations as well as sales.
• Proactive customer outreach programs are effective in treating customer issues prior to a “churn event.”

Keys to Success

Market forces continue to trigger widespread consolidation both in the customer base and within the food distribution industry itself. While customers demand lower prices and higher service levels, distributors must continuously find ways to optimize supply chain operations so as not to sacrifice margins. As a result, the use of best practices supported by leading edge technology will enable food distributors to automate processes, reduce costs, increase growth initiatives, and most importantly, ensure customer service and loyalty.

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