How do you drive supply chain transformation in the foodservice industry? Focus on something the foodservice industry can exercise control over – logistics. Sync up operators and suppliers by focusing on the data, prioritizing forecasting and planning, and fostering collaboration.
Shrinking Capacity and Rising Costs
An effective foodservice distribution strategy is dependent upon manufacturers reviewing their Total Fulfillment Costs for shipments. 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. 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.
When transportation capacity shrinks, manufacturers and distributors take a hard look at the economics of CPU (customer pickup order) versus delivery.
Traditionally, distributors 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 shrinking capacity and rising costs, some distributors have threatened to billback manufacturers for “negative lanes,” while others recommend that manufacturers increase 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.
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 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 this 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 manufacturer and their distributor customers have seen positive results. Now many manufacturers can roll out new price structures in response to shrinking capacity.
Supply Chain Collaboration
The National Restaurant Association estimates foodservice sales will increase 11% in 2021 to $731 billion, according to its 2021 State of the Restaurant Industry Report. Consumers who dine out are looking for convenience, variety, and fresh ingredients… creating a need for collaboration in the foodservice supply chain.
Larry Oberkfell, President & CEO of IFMA, says the consumer votes with their feet, and if a restaurant wants “to win their dollar then all players in the supply chain must work together to give them what they want. And there is a lot at stake to do so.”
Despite advances in transportation and warehouse management technology – operators, distributors, and suppliers don’t share unified view of logistics. Without visibility, there’s a lack of collaboration. There’s an opportunity to improve the foodservice supply chain. Even a single efficiency has the potential for major impact.
“In most cases, supply chain stakeholders are traditionally buyer and seller,” says Steve Pattison, Chief Financial Officer and Vice President of Business Analysis and Risk Management for Restaurant Services, Inc. (RSI). “In our supply chain, it’s far more complicated. There are multiple trading partners through different stages that a product goes through before it ever reaches a customer, which means there are numerous challenges in the flow of communication.”
Without strategic, technology-supported synchronization across the supply chain, unintentional errors can easily happen.
The top 3 business concerns about the foodservice supply chain are cost related.
- Commodity cost pressure
- Commodity price volatility
- Customer price sensitivity
- Although ranked 4th, logistics is one tactic that foodservice manufacturers can exercise control over
With these challenges in mind, operators, distributors and suppliers can evaluate how to optimize supply chain practices. Some goals might be to drive cost and inefficiency out of the supply chain, ensure purchasing protocols and compliance, and develop a supply chain strategy to broaden the availability of foods.
Creating a supply chain where operators and suppliers are in sync is no easy task.
But, you can start with these tips:
Focus on the Data
Without reliable data, you can’t be expected to operate efficiently. The problem is that stakeholders are using different methods of data collection and circulation.
Many foodservice supply chains focus on uniform data networks, says Eric Pfeiffer, HGS Senior Director of North American supply chain integration. There are subscription data systems such as GS1 as well as independent systems companies are using.
Dot Foods, a redistributor, has taken a leadership role with its Dot Expressway, which uses the GS1 Global Data Synchronization Network (GDSN). The manufacturing supplier provides item attributes (case dimensions and weight, marketing details and nutritional information) to the Expressway through the GDSN, giving distributors access to shipment detail. Core item data is currently available for 70% of Dot’s product inventory.
“Time is so valuable in the foodservice industry, and the Dot Expressway resource allows us to get immediate answers for our customers,” says Dana Krajacic, Sales Training Manager, Kuna Foodservice. “Having this data available at any time without having to rely on someone else to provide the information is extremely conducive to a sales representative’s lifestyle.”
+ Reduce Human Error
- At the account level, people take data out of the system, manipulate it, and then sync it. It’s easy to imagine how issues can inadvertently creep in.
- An end-to-end system would keep data consistent and accurate.
- Ultimately you want an automated system, where data flows smoothly, leaving no need for reconciling or manual follow up.
Prioritize Forecasting and Planning
The drive to get more collective visibility into what’s happening throughout the supply chain is an important initiative. When all participants do not have transparency into the various operation activities, it’s hard to accommodate changes in demand.
“The best in class collaborate with all supply chain partners,” says Cullen Andrews, VP of National Accounts at Dot Foods, Inc. “When they take a collaborative approach, there tends to be more information shared among business partners, which leads to a reduction in waste (cost) and better service when the product is at the right place at the right time at the right cost. In general it is a more quality supply chain.”
Support among restaurant brand marketing groups and supply chain teams to work downstream with suppliers to centralize the flow of goods for peak promotional events. Jeff Schroeder, Managing Partner, Kinetic 12 explains, “There is a lot of costs and waste associated with inefficiencies in how promotions are handled today. With better collaboration, the industry should be able to optimize the supply chain. All good news if you are a consumer.”
Turkey producer, Butterball, has been preparing pallets in its own warehouses so foodservice customers can cross dock. “We’re doing more and more DSD preparation for the foodservice carrier,” says Daniel DiGrazio, Senior Director of Logistics. This includes placing completed bar codes on the pallets before they leave Butterball’s facilities.
+ Why Restaurants Need to Sync Up
- Foodservice in general needs better data and visibility across the supply chain. Restaurants in particular could see major gains from synchronization.
- Pattison recalls the conversations he had during a recent supply chain optimization project: “We had distributors, suppliers, and chain restaurant operators in the same room, maybe for the first time, talking about the challenges we have in day-to-day transactions. The challenge of managing limited time offers (LTOs) was very apparent.”
- These LTOs are outside of the normal business processes, which makes them particularly prone to error. Any deficiencies in the system are more likely to cause problems during these types of product rollouts.
Supply Chain Efficiency
What You Can Learn from McDonald’s
McDonald’s sells more than 1 million pounds of beef and more than 500 million cups of coffee each year. Globally, the company buys 3.4 billion pounds of potatoes every year, and serve more than 9 million pounds of French fries every day.
The McDonald’s Supply Chain Philosophy
Ray Kroc, founder of McDonald’s, decided on a long-term, win-win relationship among restaurant owner/operators, employees and suppliers. His supply chain system was established based on trust and loyalty, eliminating a too commonly used siloed structure. He figured, for one to prosper, each must prosper.
McDonald’s targets business relationships that drive value. Kroc was determined to work with suppliers that had perpetual thinking, a supplier that will take accountability to meet McDonald’s food standards, allowing the restaurant to focus on the customer.
Pete Richter, President, Global McDonald’s Business Unit for Cargill and Chair of the US Supplier Advisory Council, affirms, “The trust and confidence in the future means we shift a majority of our resources to driving innovation, quality, supply chain optimization, and investing in future growth initiatives. This takes trust on both sides of the table, but once you establish, it creates amazing leverage vs. the traditional arm’s length RFP type approach.”
McDonald’s created highly transparent pricing protocols.
The goal? To reduce total cost, not total price and optimize processes across the foodservice supply chain.
The restaurant and its suppliers revise pricing protocols every 1-3 years based on category and region. When pricing is discussed, it is not done in the conventional cycle of bid and deal renegotiation. Suppliers don’t worry about the security of their business or profitability – suppliers spend their energy aligning pricing protocols that provide a competitive advantage for the McDonald’s.
Kroc’s supply chain system continues to set records, even after 50 years. The process has been adopted by more than 100 countries and 33,000 restaurants serving more than 68 million customers a day.
Where to Start
If you’re looking for the best point in the chain to start working towards end-to-end consistency, start with complex items. Although it’s a little counter-intuitive, if you tackle the high volume items and work your way down you’ll see bigger returns right away. Then, as you move on to items with less volume, the process will be quicker and easier.
The goal is fully integrated, end-to-end system that reflects long-term strategy.