For the Man in the Middle, Everyone’s the Boss

 

by Clyde E. Witt, executive editor

 

Shifting consumer lifestyles, industry consolidations, changing technologies, differing management philosophies — and through it all, food must be delivered.

 

Keep in mind, in change there is opportunity. And these days, for companies in the distribution of food products, there seems to be a wealth of opportunities. Flexible management practices, increased service offerings and innovative warehouse operations will define winners and losers. For material handling managers, the message is as simple as it is complicated: If you keep doing it the way you’ve done it in the past, you’ll soon be out of business. New approaches to food distribution — inside and outside the building — are going to change your business.

 

While the wholesaler-supplied system we’ve had in place for more than a century continues to be the leading source for moving groceries from the manufacturer to, eventually, the dinner plate, there are new channels forming and impacting business-as-usual.

 

No question about it, says John Block, president and CEO of Food Distributors International (FDI), the trade association for food distribution companies that supply and service independent grocers and foodservice operations. “Retail competitors [read Wal-Mart and its kin] have entered the business and streamlined the supply channel. Our members are looking for ways to compete with that and to minimize their costs,” says Block.

 

For a dozen years, FDI has produced reports and studies measuring productivity among its members. Block says members are receptive to things, such as automation, that will save them money and provide efficiency. However, food distribution remains a manual business with extremely tight profit margins. Those small and shrinking profit margins dictate that if a company cannot get payback on an investment in less than a year, the likelihood of purchasing new equipment diminishes.

 

Defining the market

 

Block says, for wholesalers, bridging the gap between themselves and independent retailers has always been a major concern. “Historically, it’s never as smooth or seamless as if you’re a chain [store],” he says.

 

And therein lies one of the principal challenges for today’s food distributor: defining the market and the competition. To the food distributor, it appears that competition is coming from all quarters.

 

What you have to do to understand the problem, explains Lloyd Morgan, principal, St. Onge Company, is take a higher-level view and see the various channels for food distribution.

 

“Basically there are three channels we, as a systems designer, deal with,” explains Morgan. These are the direct from manufacturer to retailer; wholesalers serving retail outlets and foodservice outlets such as restaurants; and distributors serving institutional customers such as hospitals and schools. Each has its own special set of circumstances and challenges. There are also variations within all these channels that have been created by special circumstances or to serve special needs.

 

At the top of this food chain are the manufacturers of food products that operate in all three channels and a vast array of other scenarios. Now, increasingly more so in fact, manufacturers (for better or worse) are dealing directly with large retailers.

 

In most cases, these manufacturers are shipping products directly to the retailers’ distribution center, bypassing wholesale food distributors. This new link being forged between the manufacturer and retailer is causing weakness as well as strength in the chain.

 

New game, new rules

 

“What we’re seeing more of,” says Art St. Onge, president, St. Onge Company, “and the kind of thing we’ve done for Kraft, for example, is the creation of what’s termed mixing centers.”

 

Mixing centers are a mecca for material handling. In the Kraft model, says Morgan, more than 40 manufacturing plants send products to seven campuses located throughout the country. Each campushas two mixing centers, one for dry groceries and one for refrigerated products. The mixing centers split palletloads and create the correct mix of products to send on to the retailer’s distribution centers.

 

“To the retailer, it appears like he’s ordering direct from the factory,” says Morgan. “In reality, his product is coming from the mixing center located nearest to him.” The advantage to the retailer for buying from the mixing center is that now he can order across a manufacturer’s entire product line, versus buying from a variety of plants and having to pay more for less-than-truckload shipments.

 

Shipping direct from plant to retailer sounds easy enough, says Morgan, but you need to know how to do distribution, which means having a warehouse attached to your plant.

 

“Manufacturers aren’t used to dealing with end customers,” he explains. “They aren’t always good at customer service or aware of the customer’s side of the business like a good distributor might be.”

 

The mixing center has created a great efficiency in the supply chain, says St. Onge. “By positioning the inventory closer to the customer, the customer can pick and choose the products he needs, knowing there is a reliable linkage between the mixing center and the retail store so there will be continuous replenishment, even in small volumes.”

 

The concept of mixing centers has evolved from the wave of consolidations within the food manufacturing industry. As the food manufacturing giants have gotten larger, they’ve seen the need to present a “single face” to their customers. In addition, the mixing center concept offers efficiencies in reduced inventories and improved operations.

 

“The next thing, or trend, we see,” predicts Morgan, “is the manufacturers shipping directly to the retailer’s stores. This is where the giant retailers, like Wal-Mart, will be leaning on the giant manufacturers.”

 

The unanswered questions in this predictable scenario are not new: Who bears the burden of cost and who gets the savings? Manufacturers are good at optimizing inventories at point of origin; now they’re working on optimizing inventory in the line to the retailer. The mixing center is a good example. In addition, as large manufacturers have gained skill in distribution, they’ve been able to offer their distribution services to smaller manufacturers that might otherwise have used a typical food distributor. An example is Starbucks coffee now being delivered to and sold in supermarkets because food manufacturers offered the delivery service.

 

It’s not all gloomy for independent food distributors. A growth area for distributors has been the rise in the food product offerings from convenience stores and from pharmacies. Large drug store chains, such as CVS and Walgreens, now offer a wide variety of food products.

And while the manufacturers ship directly to retailers’ distribution centers, there are still smaller retailers that cannot take advantage of scales of economy. The small guy has to get his products through a wholesaler or through the growing network of third-party logistics (3PLs) providers.

 

Bigger is better

 

Traditionally, the role of the 3PL in food distribution has been as more of a buffer than an active participant. Not so any more. Across various industries besides food distribution, 3PLs have taken on new jobs, doing everything from kitting and pre-packaging of products, to delivery and installation of appliances. In the food distribution industry, 3PLs are fulfilling the niche of the mixing center — and more. Not only are they mixing products from one manufacturer, they provide value-added services to retail customers by mixing products of various manufacturers, building floor-ready pallets and meeting demanding delivery-time schedules.

 

An example is the recent expansion of warehouse and distribution operations Exel has undertaken in support of the integration of Bestfoods into the foods division of Unilever PLC. Unilever Bestfoods opted to use a 3PL to manage the consolidation of its multiple operations throughout the eastern U.S. into Exel’s campus sites in Atlanta, and Middletown, Pennsylvania. Exel had to add some square footage, equipment and labor to handle the significant increase in product volume, and it had to do the work without interruption to the flow of goods from manufacturer to retailer. Exel was already doing the mixing work of several other food manufacturers at these locations. Adding Unilever Bestfoods optimized its economies of scale.

 

Mixing centers are not just big warehouses. In fact, Morgan says he is seeing a trend of manufacturers holding back and buffering some inventory to keep the mixing centers lean and mean. “Their [mixing centers] focus is on high-performance customer fulfillment,” says Morgan. “They work on not only filling orders, but also building end-of-aisle displays and promotional displays.”

 

The retailer must pay a premium for these services; the savings come from not having to do it himself.

 

Another twist on the mixing center is that offered by C&S Wholesalers of Connecticut. It has erected a large building north of York, Pennsylvania, into which it will take a manufacturer’s products, on consignment, and build mixed loads for the retail customers in the heavily populated east-central region of the country. The benefit to the retailer is that he does not have to buy the product until it’s store-ready. The benefit to the manufacturer is that his product is located near the point-of-sale. The target market for the yet-to-be-proven model is the small retailer who can’t afford to buy in large quantities and doesn’t want to hold extra inventory.

 

The common thread

 

For material handling managers, there is a common thread weaving through the permutations of food distribution, whether it be the 100-year-old model or the yet-to-be-proven, mixing-on-consignment model. The key is that virtually all models still handle cases manually. This does not deny that there has been automation of unit load handling and piece picking. Look closely, suggests St. Onge, and you’ll see that what has been automated is the movement of cases, not the selection. St. Onge says that the bulk, meaning more than 50 percent, of material handling labor in food distribution warehouses is dedicated to manual case picking.

 

And, while everyone is lowering inventories and implementing programs for crossdocking of freight, they’re attacking only a small percentage of the real cost generators. If a person is stationary at his work place, under ideal conditions, you could expect a man to unload a pallet of 25-pound cases at a rate of 450 to 500 cases per hour. That’s one case every eight to 10 seconds. Building a load of mixed cases can take twice as long. Palletizing robots have been able to relieve some of that numbing, backbreaking work.

 

Picking cases to a belt conveyor, then moving those cases to an automated palletizer, is where the food distribution system needs help.

 

You can throw only so much labor at a problem. “Until the economy turned down,” says Mike McCarthy, director, education and distribution services, FDI, “finding good employees was a challenge for our members. I’m not so sure that’s the problem these days, but these are tough jobs where labor turnover of 20 percent to 30 percent is not uncommon.”

 

Taking the next step

 

For certain, one thing you can say about food distribution is that nothing is certain. The most recent industry study by McKinsey & Company predicts consolidation within the industry will continue, and in the next decade the industry could be twice as concentrated as it is today. Much of this consolidation has to do with eliminating redundancy, and, while painful in the short-haul, should create efficiencies and significant cost savings to the customer.

 

Success will come when the supply chain is optimized. That will happen when the demand for product at the retail store level is visible across the entire network. It might be more of a software problem than a hardware problem. It’s possible, however, even with today’s technology.