Cutting stocking levels for supply chain efficiency
Jan 1, 2006 12:00 PM
An apparent excess of inventory seems to plague food distribution. Logistics professionals worry why their warehouses carry 14 days of inventory when the supply chain seems perfectly capable of delivering needed goods within 14 hours. In addition, financial officers often want to reduce inventory by 30% to 50% as a method of improving a distributor's cash position at the same time that customers demand higher service levels. At the same time, top-level managers want to pull cash from inventory for use in store development or remodeling.
Distribution management looks so simple on the surface, says Howard Hargrove, major account executive, food industry, at Manhattan Associates, an Atlanta-based firm providing supply chain execution and optimization solutions. The basic model involves moving a head of lettuce from the grower through the distribution chain to a restaurant operator or supermarket shelf. “Of course, this must be done as fast as possible, delivering the product when the customer wants it in the proper condition at the right price,” he says. “Oh, and all this has to be done in the most economical way possible.”
Performing that basic task requires distributors to break the process down into its basic components. Distributors need to identify those parts of the process that do not contribute value to the whole and discard them, Hargrove says. The valuable components must be kept and enhanced.
Customers demand frequent delivery
Customer demands compound the difficulty of taking the distribution process apart. It doesn't matter whether a customer operates a restaurant or a retail store, the demand is always for the freshest possible products, Hargrove says. Almost by definition, that forces distributors to make more frequent, smaller deliveries. “Even some of the largest supermarket chains have moved to making deliveries of perishables seven days a week,” he says. “That raises all sorts of issues, particularly about how to make products flow smoothly through the supply chain.”
In addition, revenue growth for consumer food products is relatively low, averaging about 2% a year, Hargrove says. Increased competition constantly drives retail prices lower. Published reports constantly mention Wal-Mart as the driving force behind lower retail prices. Conventional thinking holds that Wal-Mart collects 25 cents of every dollar spent on food in the US today. That same thinking projects that Wal-Mart will soon control 35% of consumer grocery spending, he says.
Price competition from Wal-Mart and other mass merchandisers puts downward pressure on selling costs with the result that the only way to fight back is to focus on cost savings and supply chain productivity, Hargrove says. Food chains are beginning to look at their logistics operations as cost centers and demanding profitability from them.
Inventory averages 10 weeks
Inventory is the first place to look for excess cost in the supply chain. Recent studies have shown up to 10 weeks of inventory in the system, Hargrove says. That breaks down into three to four weeks of inventory at the manufacturing level, three weeks of supply in distribution centers, and another three weeks of inventory sitting on store shelves. Keeping those store shelves is the main focus throughout food distribution. To make sure stores have product, distribution centers hold a certain level of safety stock in inventory, and manufacturers do the same, holding extra stock to make sure that distribution center orders can be filled.
The solution to the problem is to make inventory flow smoothly through the supply chain. If distributors can solve the flow problem, they can reduce inventory at every point in the system, Hargrove says. Distributors that solve the problem find a ready supply of money available for other uses within their organizations. “We are talking about more than simply the carrying costs of excess inventory,” he says. “We are talking about a lower investment in the real cost of goods.”
Manufacturers and distributors have good data to predict the movement of most goods in the system. Big manufacturers like Kraft know exactly how much of most product lines they sell in any given period. With such stable demand and such accurate information, the supply chain has no need for 10 weeks of supply in the system, Hargrove says. This leads to a simple conclusion. Excess inventory is the result of an inefficient supply chain, he says. One solution is to restructure the supply chain in such a way that inefficiency and excess inventory becomes more visible.
The food industry often resists cutting inventory, because traditionally high inventories provide distributors with a comfortable margin of error in supplying customers, Hargrove says. As inventory in the system is reduced, the margin of error for shortages or shipping mistakes becomes greater. Distributors go to great lengths to ensure that store shelves never become empty. Safety stock is the way distributors protect themselves against being the culprit behind an empty shelf.
Making inventory flow through the supply chain smoothly may seem simple, but every organization in that chain has a different, and often competing, agenda, Hargrove says. At each step along the line, organizations have agenda such as profitability or simply turf to protect. On the surface, smooth inventory flow just requires a cooperative effort all along the way. However, competition for power in the supply chain often stands out as the biggest obstacle to smooth flow, he says.
Big organizations tend to work in silos with every department organized a little differently with different goals and rewards for personnel. The tension between buyers and warehousing provides a good example, Hargrove says. Perhaps a buyer gets a great deal on several truckloads of frozen vegetables. That saves the company money on purchasing and looks great for the buyer's bonus plan. The problem pops up when purchasing doesn't communicate this big buy to the traffic department or warehousing.
A big buy may put undue pressure on the availability of inbound transportation. That requires the extra inventory to be moved by carriers outside the company's normal contracts, costing a lot more as a result, Hargrove says. Warehousing gets into the act when the extra inbound trucks arrive and no excess receiving labor is available to handle the loads. That causes the inbound drivers to wait while the warehouse gets organized to handle the extra volume. If the wait is long enough, the distributor gets hit with delay charges from the for-hire carrier.
At this point, available warehouse space becomes an issue. If the warehouse can't handle the big buy, the distributor has to spend lots of money on outside warehousing. Then comes a huge problem, Hargrove says. The product gets old, and merchandising says to get rid of it. That results in selling all this big buy at a promotional price, which negates the benefits of the original great deal. Worse yet, the problem continues to compound. The distributor has to hire extra trucks to get the product back from outside storage. More labor time is required in the warehouse to handle the extra volume, and stores may or may not need the heavy influx of low-priced inventory, he says.
Warehouse management systems that do not operate in real time can be a problem as well. Some of those systems are fairly modern and are great at what they were designed to do, Hargrove says. However, when a company begins to optimize its logistics system, every point in the system where information is not available or is behind actual operations becomes a choke point.
Smoothing inventory flow outside the distribution house can be just as difficult if not worse than internal operations, Hargrove says. Typically, vendors and for-hire carriers experience certain levels of low collaboration. Some really good work is being done by carriers and vendors to improve the supply chain, but the job remains a hard one. For several years observers have been saying that trucking is caught in a perfect storm of rising costs and falling labor supplies. Compounding the problem is the fact that for the first time in years, demand for freight services has outrun transportation capacity. In some transportation segments, demand is nine times higher than capacity, he says.
Fewer drivers, higher demand
The Gulf Coast wasn't the only place to be hit by hurricanes, Hargrove says. Those same storms have made fuel prices shoot up at the same time that the driver shortage became more severe in the face of rising demand for trucking. Plainly stated, transportation is in a capacity crisis, he says.
At the same time, manufacturers are attempting to reduce inventory cycle times, Hargrove says. This results in more challenging service levels and more complex supply chains. Then go ahead and throw the new federal hours of service for truck drivers into the mix. Just about every time, the rules for drivers look settled, some organization files a new lawsuit. No matter what happens, capacity will be reduced, he says.
Some studies suggest that the new driver hours of service rules have reduced available capacity by 10%. At the least, the industry will need 180,000 new drivers to replace that lost capacity, Hargrove says. In the past, manufacturers and distributors always assumed that trucking would be available. In this new, capacity-challenged environment, carriers are beginning to have the luxury of deciding what kind of freight to haul and which customers to serve.
This is a challenge that manufacturers and distributors have no choice but to solve, Hargrove said. If inventory has to drop out of the supply chain, sufficient transportation must be available to allow the remaining inventory to flow smoothly from manufacturer to consumer with no obvious choke points. This is a major change from the days when carriers begged for freight to the present when distributors must attract carriers to ensure adequate transportation capacity for an optimized supply chain.
Flow is important throughout the supply chain — not just in terms of goods but also with every facet of business. Inventory has to flow smoothly; so, also, does information have to move unfettered up and down the supply chain, as do finances, Hargrove says. Information has to provide knowledge of what is happening, what is coming, and what is about to go wrong, he says. Optimized information flow allows distributors to avoid problems and gives them the flexibility to handle those problems that do crop up.
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