Transportation & Distribution: Geared to Demand

One word captures today’s transportation and logistics sector: uncertainty. Shippers and service providers are engaged in a recurring tug-of-war as changing demand patterns challenge broader supply chain paradigms. The backdrop: a slowly recovering U.S. economy teetering on the precipice of a fiscal cliff.

In the North American market, these changing demand patterns assume various forms: the rapid growth of e-commerce; intermodalism; migrating consumer demographics; capacity and labor constraints; industry regulation; fuel cost fluctuations; and labor unrest. All these factors are in play as U.S. manufacturers and retailers plan their roadmap for the future.

“Five years ago, before fuel indexes began rising every 15 days, companies were in good shape if they optimized their networks every five years,” said Gene Long, director of New York City-based Deloitte Consulting, at the Supply Chain Council’s Supply Chain World Conference in April 2012. “Today, the half-life on a North American network design, given fuel price volatility and labor costs, is about three years.

“Companies have to look at their networks scientifically, and more frequently, or costs will spiral out of control,” he added.

Network optimization is one way shippers address market variables. Companies also tap third-party partnerships, and seek more collaborative business process improvements to help steer their businesses into a new growth curve. While cost remains a common denominator in many of these outsourcing decisions, service is emerging as a new driver. Shippers similarly recognize the value and support third-party logistics intermediaries provide as they navigate an uncertain economy that breeds inefficiencies and imbalances.

Rethinking a 30-Year-Old Supply Chain

When Schwan’s Home Services began its network optimization journey in 2010, the company was challenged to make a very difficult decision. It had to shrink to grow.

The Marshall, Minn.-based direct-to-consumer division is the largest of Schwan’s three operating units, and delivers to 90 percent of the 48 contiguous United States. It operates a route-based system that distributes product to consumers every one to two weeks. Seventy percent of the product it sells is co-manufactured with outside companies; the remainder is produced at eight manufacturing plants across the United States.

Before it revamped its network, Schwan’s operated 475 company-owned depots around the country. The depots are inventory-holding distribution nodes that maintain a fleet of 10 to 15 propane-powered trucks at each location to make daily deliveries. Depots are replenished every 8.2 days out of Schwan’s national distribution center in Marshall.

“What is unique about our business is that these depots are living and breathing sales companies,” says Jeff Modica, vice president of supply chain, Schwan’s Home Services. “Sales reps go out on pre-determined routes, carrying about 500 stockkeeping units (SKUs) in different quantities. Loads are built differently each day, depending on demand for that route.”

By 2011, Schwan’s realized its delivery network was critically outdated. Steady growth over 60 years, and re-investment in brick-and-mortar infrastructure, had bloated Schwan’s footprint, accumulating unnecessary fixed costs. When Modica and his team evaluated the company’s status, they recognized it needed a different way to operate—and an outside perspective. So they brought in Deloitte Consulting to marshal a network analysis and redesign.

“Large, complex networks often grow until the aggregate effect of many good decisions is no longer aligned with the marketplace,” explains Long. “That’s where Schwan’s found itself.”

To bring the Schwan’s network in sync with the changing market, Deloitte had to consider the unique nature of its business model.

“For many businesses, the expense of running a network is non-human—it is asset-, fuel-, and technology-driven,” Long says. “But Schwan’s has a live selling network. Drivers get out of the truck and contact the customer. The higher percentage of built-in people costs makes getting the right answer more difficult.”

When Schwan’s considered these challenges, it set out to achieve three primary objectives.

“First, we needed a lower cost to serve,” says Modica. “Second, we had to be more flexible. Buying and owning assets wasn’t necessary. We had to be able to make variable costs out of fixed ones by using leased facilities, public cold storage, and third-party logistics (3PL) providers. Finally, we had to right-size the network.”

Service- vs. Cost-driven Demand

While Schwan’s U.S. supply chain transformation is unique because of its labor-driven, depot-centric distribution model, it demonstrates a common challenge that manufacturers and retailers face as they try to scale their networks to be more responsive to demand changes.

“A few years ago, we started noticing a change in product placement—less big-region, more small-region fulfillment,” says Karl Meyer, CEO of 3PD, a Marietta, Ga., provider of high-touch, last-mile delivery service throughout North America.

“That shift was driven by fuel pricing, and the desire to get inventory closer to the market,” he notes. “The big trend was reducing long-haul miles per load. Now companies are using the same solution for a different problem: velocity—or the speed to fulfill an order, whether it’s into brick-and-mortar or virtual marketplaces.”

This new service-driven impulse will stimulate greater demand for third-party partnerships, Meyer contends, especially because many brick-and-mortar companies don’t have the capabilities to pop up a new DC overnight or integrate new technologies with enterprise systems.

“Companies are also more willing to conform to an established process that fits their needs,” he says. “That shift has to happen. Five years ago, big box retailers that ran their own delivery services, or outsourced dedicated fleets, thought co-mingling freight was an insult to their brand.”

Meyer compares this new sensibility to the way European organizations traditionally managed their supply chains—where solutions are perceived as cost- and service-driven, rather than proprietary.

As shippers become more receptive to upstream collaboration, 3PLs are softening their edges as well. The high price of fuel notwithstanding, many 3PLs have tried to break out of the transactional mold, and emphasize the importance of supply chain partnership.

“We’re more open with customers, encouraging them to work together to reduce transportation spend,” says Steve Buckman, vice president of operations, Kane Is Able, a 3PL based in Scranton, Pa.

Some companies demand as much from their service providers. Kane recently began working on a pilot program with a large retailer that required the 3PL to completely open its books.

“We would not willingly have done that five years ago,” Buckman says. “Today, that’s how we work with customers. Some still want a transactional relationship. But we want to help them understand the decisions we’re making, and how they impact cost.”

Raisin’ the Business Case for Consolidation

Kingsburg, Calif.-based Sun-Maid Growers of California is one of Kane Is Able’s collaborative distribution customers. The growers’ cooperative is the largest raisin and dried fruit processor in the world, and uses 19 third-party-owned warehouses throughout North America to distribute product to mainline grocery customers. Kane Is Able serves that capacity in Sun-Maid’s Mid-Atlantic territory.

“It has become common for grocery stores to order only what they need every week,” says John Slinkard, vice president, customer and supply chain services, at Sun-Maid Growers of California. “They don’t carry much, if any, inventory in their DCs. Order frequency has accelerated over the past decade, and average order sizes have decreased.”

Order sizes might have been 15,000 pounds a decade ago; now they typically range from 5,000 to 7,000 pounds. Because Sun-Maid doesn’t have the size or scale of a larger company such as Kraft, it can’t build full truckload (TL) shipments going into grocery DCs.

“These orders are on the cusp of being expensive less-than-truckload (LTL) moves,” Slinkard explains. “Shippers moving only 500 pounds via LTL have no other choice. But when the load weighs 7,000 or 12,000 pounds, finding another shipper with similar volumes lets them pay for half the truckload, rather than the full LTL price.”

When its warehouse provider in the Mid-Atlantic region ran into financial problems five years ago, Sun-Maid began looking for a new partner. Some of its other 3PL providers had internal consolidation programs in place, but when Slinkard visited Kane, he found a completely transparent collaborative distribution model.

“Kane offered to share that information,” Slinkard recalls. “Consolidating shipments meant we’d pay a portion of a TL rate, rather than a true LTL rate, and Kane would provide a monthly report that broke down the data.”

That was a deal-maker. The consolidation program Sun-Maid has participated in over the past several years has become a supply chain equalizer for the cooperative.

Strategically, Kane is focused on building relationships tied to collaborative distribution. That is a huge value-driver, especially for shippers in the mid-tier market.

“Five years ago, it would be typical for a retailer or manufacturer to come to us with outbound freight and simply ask us to bid the lanes,” says Buckman. “Now a shipper might ask what we can do to optimize how product moves through its supply chain.”

Collaborative Distribution from Source to Shelf

Kane’s collaborative distribution model anchors everything it does. Orders typically come in through electronic data interchange and enter the 3PL’s warehouse management system. Customer service reviews the orders, formats and validates the data, then releases them into Kane’s LoadCon pool system.

The system automatically recognizes shipments for LoadCon customers, and puts the orders into a special work queue. It then evaluates and matches retailer required availability dates (RAD) with each shipment’s destination and expected transit times—constantly building, rebuilding, and optimizing full truckloads.

Shippers such as Sun-Maid are similarly helping to expand the collaborative distribution concept, recognizing that the more stakeholders are involved in the program, the more opportunities there are to co-mingle freight. When the cooperative got to a point where it was averaging 30-percent product consolidation, Slinkard approached Kane to find out how they could bump up that figure.

Let’s Get Together

Sun-Maid’s sales group began talking with grocery buyers that were receiving other customer shipments through Kane to see if they could align inbound moves. This would allow them to consolidate Kane truckloads and create fewer trips into the DC.

Kane has taken a more passive approach with retailers, looking to soft-channel manufacturing partners into the program. It’s more about listening and educating than trying to force the issue.

Nonetheless, some demand-driven grocery companies are using the 3PL as leverage. “We’ve had retailers select a RAD for a group of manufacturers, then ask Kane to deliver those orders together on a single truck,” Buckman explains. “When a retailer takes that first step to get alignment on RAD, that’s very high value.”

Sun-Maid has found mixed success engaging retail customers to consolidate inbound transportation. As one positive example, Target provides the cooperative with weekly orders at the same time. “Six months from now, Target will order every Tuesday,” says Slinkard. “Having that hard date helps us plan, and work with other warehouses where products ship from, to consolidate additional moves.”

Sun-Maid’s campaigning has helped push consolidated volume from 30 to 40 percent. Slinkard is even willing to steer his grocery business associates in Kane’s direction.

“The more companies warehousing with Kane, the more consolidation opportunities are created,” he explains. “We’re never going to hit 100 percent—that’s unrealistic. But I will take every opportunity I can to gain those significant savings.”

The program has its limitations, however. Most large companies do their own consolidation at mixing centers, and have little need to participate in 3PL-driven programs.

Slinkard also avoids co-mingling certain product categories that pose problems for ambient raisin and dried fruit shipments. For example, pet food aroma attracts insects, and its packaging isn’t always air tight.

Then there is competitive hubris, reflected in Meyer’s observation about U.S. industry moving away from proprietary self-interest to more altruistic cost and service drivers. But Slinkard doesn’t see this as a problem for Sun-Maid. A number of its competitors supply private-label goods to grocery store chains. Buyers are purchasing from both.

“Buyers may be telling them to move their shipments to Kane because then they can perform their own consolidation,” he says. “I don’t have a problem with that. If my competitor and I both have half a truckload, we both benefit.”

Striving for Continuous Improvement

In Kane’s collaborative distribution model, bringing more partners into the program amplifies the benefits to all supply chain partners. Schwan’s found similar flexibility and continuity in the network analysis roadmap that Deloitte delivered.

The consultant approached the redesign using quantitative and qualitative analyses, IBM’s LogicNet Plus network optimization tool, and Excel spreadsheets. The objective was to formulate a number of “quick hits” that Schwan’s could make to immediately bring more balance to its network.

Deloitte considered depots where there was overlap or that had historically under-performed—simple quantitative assessments. Then it overlaid qualitative factors. For example, would a change in management personnel at the depot impact profitability? With this approach, Deloitte was able to eliminate one dozen facilities early on, providing momentum in its analysis.

One wrinkle the optimization project presented was making sure all of Schwan’s functional teams were involved in the process, and understood how changes to the network might impact their operations. Concurrent with the network redesign, the company was also transforming its sales operation—evaluating its go-to-market strategy, with specific attention to how it delivers in neighborhoods, and its ability to meet on-time delivery expectations.

In this regard, sales and customer service are very much tied to network performance. Consequently, Deloitte initiated monthly cross-functional workshops with different stakeholders in the company. Keeping everyone informed meant the company didn’t have to spend weeks explaining the changes to other departments.

More importantly for Schwan’s, Deloitte helped build a center of excellence within the organization that could take the lead on optimization projects moving forward.

“These projects involve transferring knowledge, and building intellectual property,” explains Long. “We worked person-to-person with Schwan’s. When we left, the company had an operational team that could perform the analysis again.

“I characterize it as the innate transfer of real knowledge,” he adds. “The organization is fundamentally self-capable. It can replicate this process as many times and as quickly as it wants.”

Taking a Step Back to Step Forward

It took Deloitte 16 weeks during 2011 to collect and analyze data. Schwan’s began implementing “quick-hit” improvements later that year and throughout 2012, and will evaluate 3PL pilot data and re-optimize the network moving forward into 2013. Modica and his team took Deloitte’s quick-hit recommendations and went deeper, shuttering 54 depots.

Additionally, Schwan’s has migrated to a hybrid model that uses existing company-owned depots, master depots with hub-and-spoke shuttle systems, and 3PL-managed facilities. As the company removes and/or re-tasks nodes, the network continues to change—setting the stage for further optimization in 2013.

While the financial impact of Schwan’s network optimization is under wraps, it achieved marked operational and asset appreciation savings, in addition to avoiding some cost and gaining revenue from the sale of assets. But the greatest achievement was gaining the support and confidence of Schwan’s leadership.

“How do you convince the CEO you want to shrink to grow—take $70 million off the top line? That’s not an easy thing to do,” Modica explains. “In the beginning, it was difficult to understand that taking a step back is a step forward.”

One Size Does Not Fit All

If shippers have learned anything over the past few years, it’s that flexibility is compulsory in today’s marketplace. Companies need to have a nimble supply chain strategy capable of hedging risks due to unforeseen exceptions, flexing capacity and labor, switching modes and shifting assets, and aligning distribution networks to best meet speed-to-market and cost demands.

Four years ago, economic recession forced the issue for many companies. It was a matter of survival. Decision-making was reactionary. Now, as companies look to spring back into pre-recessionary growth mode, they fear the consequences of impulsive or uninformed planning and execution, or worse still—inaction. The “new normal” business environment offers no guarantees.

The challenge for companies such as Schwan’s and Sun-Maid is right-sizing networks or asset needs when the right size remains nebulous. That’s why one endeavored to optimize its distribution network by using a hybrid insourced/outsourced model; and the other explored collaborative distribution as a means to create better economies of scale in its transportation operations.

The supply chain provides an anchor for companies to tether their core business growth strategies without assuming undue risk and cost. But there must be slack to accommodate change. It’s why industry at large has trended toward third-party logistics partnerships that favor variable-cost flexibility, insulate against risk, and allow companies to shrink or grow as demand dictates. It’s why supply chain management acts as a force equalizer when myriad dynamics push and pull companies in different directions.

If there is one certainty in today’s market, it’s that transportation and logistics partnerships—and the ability to flex supply chains to demand—is as important now as it ever has been.