Strategy for the Capacity Crunch

Posted on August 9, 2018 by Caitlin Orosz under Foodservice 101

An effective foodservice distribution strategy is dependent upon manufacturers reviewing their Total Fulfillment Costs for shipments. It’s critical to take a look at shipments of various sizes and to various geographies to get ahead of the capacity issues facing the foodservice distribution industry.

Shippers everywhere are feeling the capacity crunch. With causes as diverse as a strong economy, an aging driver workforce, government regulations, and a stable construction industry, limited capacity is affecting pickup and delivery procedures for food manufacturers and their distributors.

Dave DeWalt, a self-proclaimed “foodservice lifer,” has worked in the industry since 1972. In 1996, he started Franklin Foodservice Solutions to bridge the gap between food manufacturers’ marketing and sales decisions and supply chain realities. We asked Dave to share his experiences with today’s supply chain challenges and provide advice to manufacturers on ways to introduce more profitable pricing and order policies on outbound shipments.

Shrinking Capacity and Rising Costs

As transportation capacity has shrunk, manufacturers and distributors have taken a hard look at the economics of CPU (customer pickup order) versus delivery. Traditionally, many distributors have preferred to pick up from the manufacturer since they can move freight at a lower cost than the manufacturer’s freight rate or delivered price.

But when distributors’ costs go up, the CPU margin shrinks. In response to the shrinking capacity and rising costs, some distributors have threatened to billback manufacturers for “negative lanes,” while others have recommended that manufacturers consider increasing the delivered price.

To get in front of the growing transportation issue, DeWalt advises manufacturers to study their Total Fulfillment Costs for shipments of various sizes and to various geographies. He then helps manufacturers to:

  1. Establish price and order policies that maintain customer incentive to pick up or increase delivered order size.
  2. Ensure that future freight cost increases are covered by their price structure.
  3. Investigate opportunities to shift delivered volume to redistribution.

Recently, DeWalt worked with a food manufacturer who wanted to get ahead of the capacity issue.

To find the best solution, DeWalt and the manufacturer went to the facts: “Look at your fulfillment costs and price structure – What does it cover? What doesn’t it cover?” he advises. To start, DeWalt analyzed the manufacturer’s last twelve months of shipment and CPU data.

Then, he mapped out geographic locations of the key CPU customers, calculated actual freight costs and delivered freight rates for each market. This data provided visibility into customers’ inbound costs and showed what markets were at risk of customers switching to delivery.

Armed with this data, the manufacturer could model various transportation combinations, including number of brackets, bracket definitions and price premiums.

Using an existing redistribution program, they then created a “Redi vs. Direct” P&L by order size to show the financial impact of moving volume from direct to redistribution. “If you don’t have a redistribution program, it’s time to understand what small order activity is costing you,” says DeWalt. There is always a lot of activity and cost around small orders and offloading to a redi program can create savings.

DeWalt worked with the manufacturer to establish a new price structure and policies that supported their goals. This new structure:

  • Added a “Maximum TL Bracket” – giving customers incentives to max out TL orders
  • Adjusted Freight Premiums across Brackets to
  • Reflect future freight costs
    Ensure CPU Margin for key distributors
    Provide sufficient Gross Margin for the redistributor
  • Reduced number of “Less than Minimum” orders and shifted them to redistribution service

The result has been positive for both the manufacturer and their distributor customers. Now many manufacturers can roll out new price structures in response to shrinking capacity.

 

This article originally appeared in the Smoke Jumpers magazine. Subscribe for your free copy today!