Logistics Viewpoints

A complete analysis of logistics trends, technologies, and services

Guest Commentary: Thirsty for DSD Efficiency? Issues and Answers

Consumer Packaged Goods (CPG) | By •

The beverage business has become much more complex, dynamic and fragmented over the last five years. One of the reasons why is consumer taste buds are changing in both developed and emerging markets. The result is a dizzying plethora of choices to quench every thirst, from hundreds of craft beers to Chinese colas to a seemingly endless stream of flavored energy drinks.

According to a recently published survey, “Global Beverage Survey 2013-2014: Market Trends, Buyer Spend and Procurement Strategies in the Global Beverage Industry, the following are some key market issues and trends:

  • Global beverage manufacturers consider China, India, and Brazil to offer the largest growth potential among emerging markets in 2013-2014.
  • Pressure on margins, volatility and increase in input costs, and regulatory changes are immediate business concerns.
  • The top three expected key changes in business structure are: improving operational efficiency, adding new products and services and expanding in emerging markets.

In the United States, the number one challenge is keeping inventory in-stock. Direct Store Delivery (DSD) business models currently average 98.2% in-stock. If beverage companies can optimize DSD with an integrated planning and execution solution, they will have the opportunity to synchronize the salesperson, the merchandiser, and the delivery truck in the most efficient manner possible.

Complexities and Challenges
According to a Grocery Manufacturers Association study, the activity that takes the most time away from working the shelf is associates waiting to receive product at the store. There are many challenges associated with DSD, including:

  • Balancing DSD territory assets against customer demand fluctuations.
  • Underutilized fleet assets.
  • Improving collaboration of sales, operations, planning, execution and the retailer.
  • Compliance of store visits by sales and merchandisers, as well as delivery routes.
  • Inaccurate fill rates due to unique promotional driven pallet configurations required by the retailer.

And among the complexities…

  • The move from static routes to dynamic routes creates a new set of business process changes.
  • In-stock replenishments depend on harmonious synchronization between Sales and Operations.
  • Getting retailers to share point-of-sale (POS) data.

How to Handle DSD Logistics Challenges
DSD networks bypass the retailer/wholesaler distribution network moving goods directly from the point of production/distribution to the stores. Managing this process efficiently also requires a fully integrated DSD planning and execution platform.

Many beverage companies today use legacy routing and load building systems, in many cases, manual systems. Most of the beverage industry leaders – including Coca-Cola, Heineken, Molson Coors, and Carlsberg – use an ERP system known for its ability to support Consumer Good companies that are distribution-intensive in nature. They addressed the “white spaces” for DSD by embedding a best-of-breed solution that operates natively within their ERP solution, without any interfaces, and uses the ERP’s master data.

The companies referenced above have modernized business strategies and processes that make them global DSD leaders for beverage. Their businesses depend on “delivering beverage,” but behind the scenes, there are numerous logistical and operational challenges that they must address. These companies wanted to leverage their ERP ecosystem to plan truly efficient routes, build customer delivery loads with mixed-pallet configurations, and build fully-utilized delivery trucks. With their embedded DSD solution, they can identify optimal territory networks to improve customer service levels; simultaneously generate optimal next day planned routes and loads; and execute accurate case pick using voice picking to allow for a seamless flow of business data through their ERP.

Quenching the Thirst for DSD Efficiency
DSD businesses are very complex given the nature of delivering direct to the point of sales. Beverage companies make 10-20 deliveries on a given route and require compliance for on-time delivery. Lost sales due to out-of-stock situations can cause a beverage company to loss shelf space given the margins retailers manage to. Improving in-stock levels using an integrated platform is the value attained. Improving labor efficiencies in this business model is crucial because synchronization from sales order intake, to merchandising the shelf, to delivery requires true collaboration and accuracy between internal parties on an integrated platform. For global beverage companies, using technology to fill the “white spaces” has led to a reduction in miles driven, ensured that sales territories are defined to enable optimal delivery frequency, increased efficiencies in trailer utilization, and reduced load planning time and order delivery accuracy. Leaders in the beverage industry have chosen to address the complexities of DSD head-on by investing in technology that  improves operational efficiency and preserves their market leadership in an increasingly competitive global marketplace.

Bobby Miller is Global CPG Strategist at ORTEC. Bobby pioneered the innovative ORTEC solution ‘Perfect Shipment’ which utilizes demand forecasting to generate optimal shipments, enabling organizations to plan and reduce freight cost in advance of execution. He has over 25 years of expertise working in the Consumer Goods Industry and developing supply chain software solutions that help companies globally such as P&G , General Mills, Coca-Cola and Clorox. Prior to ORTEC, Bobby was Sr. Manager of Supply Chain Excellence for Georgia-Pacific, where he pioneered the concept of sales order load optimization. He has also held various positions with Kraft, Coopers Lighting, Information Resources, IRI Logistics and Manugistics. Bobby received a B.S. degree in Information Systems from Chicago State University.  He is currently chairman of the Technology Association of Georgia Logistics Society.

TNT Express Reaps the Benefits of Operations Research

Business Intelligence | By •

The important role of operations research in driving supply chain benefits was in full display at last month’s OPTIMUS 2012, ORTEC’s annual forum in Atlanta, GA. Many of the company’s key clients were there, including Walmart, Coca-Cola, General Mills, and Clorox. In the case of Coca-Cola, for example, the company has saved $500,000,000 in ten years through a variety of initiatives, including improved loading and routing of its 10,000 trucks (see “Coca-Cola Enterprises: Better Trucks, Happy Drivers, Lower Costs”). And in Walmart’s case, the company developed a hybrid solution for routing and load design, and expanded its network design to include its grocery unit, which resulted in a 69 percent improvement in its private fleet efficiency over its 2005 baseline.

But the case study that caught my attention the most was TNT Express, the winner of this year’s prestigious Franz Edelman Award, presented annually by the Institute for Operations Research and the Management Sciences (INFORMS) to “recognize and reward outstanding examples of operations research, management science and advanced analytics in practice in the world.” In the world of operations research, winning the Franz Edelman Award is like winning a gold medal at the Olympics, and TNT Express — with support from its partners ORTEC (a Logistics Viewpoints sponsor) and Tilburg University — was certainly a worthy winner for the success the company has achieved with its Global Optimisation (GO) Programme.

The GO Programme is a multi-faceted initiative TNT Express launched several years ago to achieve several goals: reduce unit costs; provide better service; enable better and faster fact-based decision making; and reduce CO2 emissions. The program not only involves the use of optimization solutions, but also the creation of Communities of Practice (cross-functional teams, including partners, that meet three times per year to identify, discuss, and exchange best practices and potential improvements) and employee training and education via its GO Academy.

Source: TNT Express

Thanks to the GO Programme, TNT Express has realized more than €207 million (about $266 million) in cost savings and 283 million kg (about 300,000 tons) reduction in CO2 emissions from 2008-2011. The bulk of the savings has come from a variety of optimization tools, including:

  • ORTEC Shortrec for optimizing pick-up and delivery (PUD) operations, which has delivered €22 million in savings from 2008-2011;
  • TRANS for network planning, which has delivered €48 million in savings to date;
  • DELTA for calculating low-cost transportation schedules, which has saved TNT €132 million in four years;
  • MANPOWER for optimizing depot and warehouse resources, which has produced €5 million in savings.

You can get more details about the program at the TNT Express website, where the company has posted several videos and articles about it. But here are some of my key takeaways:

Start small and let success build upon success. The GO Programme started out with Marco Hendriks, Director Strategic Operations and Infrastructure at TNT Express, and his vision about “how operations research and mathematical modelling could add value to TNT.” Despite some “early skepticism about using ‘mathematics’ to improve our global operations,” Marco received approval to conduct a pilot project in Italy, and ORTEC and Tilburg University were selected as partners. “We resisted the tendency to build a sophisticated optimization model, instead starting with basic data analysis compiled from separate commercial, finance, and operations systems” explained Hein Fleuren, Professor in Operations Research at Tilburg University. Based on the insights from the analysis, the team identified and implemented changes that resulted in a 6.4 percent cost reduction. The success of this project led to other projects across Europe, which ultimately grew and evolved into the GO Programme.

Simply put, rather than starting with a grand vision and multi-year project outline, the best way to overcome skepticism, minimize risk, and win upper management support for investing in operations research is to keep it simple: start small, prove the value, and build out from there.

Ease of use is critical for technology adoption. Professor Fleuren sums it up nicely in one of the articles: “In all cases, these GO tools are the econometric models that are used to calculate the best optimization solutions. For TNT, they have to meet many different criteria. First, they have to be transportable so that they can be used in different countries, for different networks and even in other organizations. Secondly, and very importantly, despite the complexity of the models, their design has to be user friendly so that TNT’s employees — who are not mathematicians — can work with them effectively.”

This point underscores one of the key trends occurring in the enterprise software industry today: vendors are investing to simplify and improve their user interfaces, which is quickly becoming a competitive differentiator.

Technology is not enough; you must also invest in training and educating your employees. One of the most important components of the GO Programme is the GO Academy, a training program developed in partnership with Tilburg University and the TiasNimbas Business School. Here are some comments about it from TNT:

The main objective of the GO Academy is to train employees in optimization principles and broaden their views without turning them into mathematicians. The end result is the creation of a global network of talented staff that is able to standardize, identify, and implement solutions.

More than 200 employees from around the world have completed the two-year program, which includes six modules on topics such as infrastructure design, network planning, bottleneck theory, and change management techniques. Marie-Christine Lombard, the former CEO of TNT Express, put it best when she said, “The GO Academy is probably the best investment TNT ever made.”

Clearly, TNT Express understands the critical role of talent development, not only in maximizing the benefits of operations research, but also in creating a competitive advantage for the company. (For related commentary, see “The Most Significant Problem Facing 3PLs and Shippers”).

The bottom line: the bonds between operations research and supply chain management continue to strengthen, and companies that invest smartly in this area — not only in technology, but in talent development too — will gain the greatest benefits moving forward.

The Advancing Field of Supply Chain Risk Management

Supply Chain Risk Management | By •

I received a newsletter from the Supply Chain Risk Leadership Council (SCRLC) and it made me realize how much this field is starting to advance. SCRLC has developed a very nice way of categorizing supply chain risk management (SCRM). They view it as being composed of five distinct disciplines:

  • Preparedness, Continuity, and Recovery Planning;
  • Regulatory & Security;
  • Supply Chain Resiliency;
  • Risk Assessment and Monitoring;
  • Supply Chain Incident Detection and Crisis Management.

The council’s goal is to generate “a thick 3-ring notebook filled with Best Practices” for each discipline.

In preparation for that task, the Risk Assessment and Monitoring track is starting by defining terms (i.e., compiling a ‘lexicon’ of terms). I found the definitions interesting because they show how deeply the organization is thinking about this topic. Here are a couple of examples.

SCRLC prefers the term “risk management” to “crisis management” because the latter implies an after-the-fact response to a crisis, while risk management is more proactive.

The term “Risk Appetite,” however, is more difficult and elusive to define. “It’s a concept you can resonate to at fifty thousand feet, but when you try to implement it on the ground as a practical application, it’s very tough,” says John Brown, Director, Risk Management, Supply Chain Development, Coca-Cola Company, and a member of the track. “It’s important to have a measure so individuals within a company don’t take more down-side uncertainty than a company can reasonably bear or less than is optimal for a company to tolerate. But with the exception of financial services, it’s very cutting edge to develop a metric that puts numbers on risk appetite. There are so many functions within a company, how can you say concisely what is acceptable risk? Most risk levels at the enterprise level are more qualitative than quantitative.”

“Risk Tolerance” is equally difficult to define.  As Brown notes in the newsletter, “ISO defines it as an organization’s readiness to bear risk, which can be interpreted as an absolute boundary that the company can accept and still survive. But some companies would say just the opposite—that Appetite is the total picture and Tolerance falls within that.”

The council has an interesting set of members, including Cisco. I was briefed by Cisco on its approach to SCRM a couple of years ago and was blown away. Cisco has to be one of the best companies in the world when it comes to SCRM. 

Finally, I was fascinated by the council’s list of resources, websites that could provide very useful information to a SCRM team. These resources include CNN; the Emergency Email and Wireless Network (breaking news and emergency email notifications of natural disasters or other emergencies in a particular locale); the World Health Organization; Centers for Disease Control (tracking of pandemics and acute disease outbreaks); the World Metrologic Organization; the US Geological Survey/Earthquake Information (earthquakes, hurricanes, cyclones, and severe weather); and Maplecroft Maps (portfolio of risk indices displayed in interactive maps; I plan to get briefed by them soon). 

In conclusion, although the field of supply chain risk management is advancing, it is still in its infancy, and most companies still only focus on business continuity and recovery planning and not the broader approach to SCRM put forward by this council.

Coca-Cola and PepsiCo: $20 Billion for Distribution Flexibility

Food & Beverage Industry | By •

In an article last Thursday, The Wall Street Journal announced that the Coca-Cola Company was nearing a deal to buy the bulk of its largest bottler, Coca-Cola Enterprises.  This was interesting news to me because the acquisition, like PepsiCo’s deals to buy its two biggest bottlers, The Pepsi Bottling Group and PepsiAmericas, was driven in large part by the need for distribution flexibility.

A little refresher course on this industry might help to explain what is going on. Coca-Cola Company and PepsiCo were originally vertically integrated. The companies developed the products, manufactured and distributed them, and took care of marketing. Then, several decades ago, these companies divested the manufacturing and logistics responsibilities to bottlers while retaining control of product development and marketing. The bottlers manufactured the products – mostly carbonated beverages – and distributed a large portion of them using direct store delivery (DSD) to retail establishments rather than delivering to retail distribution centers. 

As for the supply chain drivers of these mergers, the authors of the WSJ wrote:

The anchor bottler strategy worked well for Coke in the 1980s and 1990s when consumers were drinking increasingly more soda that was shipped in high volumes. But since then, the interests of Coke and its bottlers have diverged, as the drinks giant seeks to adapt to consumers moving away from soft drinks to more niche, noncarbonated offerings [such as bottled water with vitamins and flavors, juices, and teas].

Owning a bottler would give Coke flexibility. It could decide to distribute via its bottling system, through which products are delivered directly to stores. Or it could deliver drinks through warehouses—cheaper and preferable for products too small or not profitable enough to distribute cost effectively through the more expensive “direct store delivery” system.

When PepsiCo Chairman and CEO Indra Nooyi launched that company’s similar move in April, she said owning the two bottlers would give it the flexibility to decide how its beverages should be distributed. [The move would also allow PepsiCo] to have greater control over development, distribution and marketing of new products. Owning its bottlers allows PepsiCo to negotiate alone with retailers, rather than sharing that task with representatives of separately publicly traded bottlers.

In the press release at the time of PepsiCo’s announcement, Ms. Nooyi said that “The fully integrated beverage business will enable us to bring innovative products and packages to market faster, streamline our manufacturing and distribution systems and react more quickly to changes in the marketplace, much like we do with our food business. It will also make it easier to leverage ‘Power of One’ opportunities that involve both our beverage and food offerings, and for PepsiCo to present one face to retail customers. Ultimately it will put us in a much better position to compete and to grow both now and in the years ahead.”

The PepsiCo transaction is expected to create annual pre-tax synergies of $300 million by 2012 largely due to greater cost efficiency and also improved revenue opportunities. And this was another factor in Coca-Cola’s decision to follow suit. Once PepsiCo had direct control of distribution, and had cut out the middleman, it would potentially have a price advantage over Coke.

In summary, changes in customer tastes, SKU proliferation, and having products with different distribution velocities, has led to deals that are cumulatively worth about $20 billion.

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