merchandising Archives

Nestle DSD Makes Optimal Production Sourcing Decisions

Food & Beverage Industry | By Steve Banker • 06/06/2011

Nestlé USA has a Direct Store Delivery (DSD) division focused on several of its frozen food brands, including Edy’s and Dreyer’s (ice cream) and Digiorno, Tombstone, and Jack’s (frozen pizza). The company’s move to DSD began in 2006 when it acquired Dreyer’s Grand Ice Cream and the scope of its operations has grown since acquiring the pizza brands.

DSD can be a competitive route to market. Food companies often pay to have their products placed on retailer shelves. But if a food company has DSD capabilities supported by an efficient supply chain organization, it doesn’t have to “pay to play” (or at least not to the same extent). This is particularly true for smaller stores and chains.

Brad Alford, Chairman & CEO of Nestle USA, gave a presentation last September where he provided some facts about Nestle’s DSD operations. For its ice cream brands, Nestle pre-sells and pre-picks items before delivering them to freezers at the back of the store. Later, merchandisers arrive at the store, pull the product out of the freezer, and bring it to the front of the store. Merchandisers visit the stores multiple times a week. This business generates $2.2 billion in annual revenue and is supported by 2,200 full-time employees.

In contrast, pizza DSD is based on a “rolling inventory model,” which I assume means the drivers arrive at the stores, check the inventory, and then deliver what is necessary. This business generates $1.9 billion in annual revenue and is supported by 1,500 full-time employees.

Nestle has the fourth largest, company-owned DSD system in the US food industry and it is by far the largest in frozen foods. To support this business, the company has 30 distribution centers and about 200 cross-docks. This is a large number of warehouses, but in DSD you need warehouses close to the stores.

At JDA’s user conference last month, two Nestle DSD supply chain managers gave a presentation on how the company is using a strategic network design solution from JDA—Production & Sourcing Optimization—on a quarterly basis to determine optimal sourcing by lane. In the ice cream DSD supply chain, transportation and frozen storage costs are high. Consequently, Nestle has redundant plants and production lines across the US. The network is made more complex by the fact that demand for ice cream is seasonal (greater demand during the warmer months). Thus, the decision about how far ahead to forward load production and where production should be done is complex.

The JDA solution answers the question, “Where should we make a product based on storage, handling, manufacturing, transportation, service, and inventory carrying costs?” Service costs are based on a penalty logic that is parameterized into the solution. The thinking is that retailers don’t like it when their shelves are empty, and some retailers even impose fines. The solution can also look at the profitability by case of the different SKUs. In instances where demand is outstripping supply, the solution can determine which cases should be cut.

Running these plans quarterly is a bit unusual; strategic planning is typically done on an annual basis. In Nestle’s case, however, demand changes are significant enough that doing it quarterly makes sense.

In Nestle’s first year using this solution, the company saved $5.5 million!

To get there, the company had to move to centralized production planning and it had to create a centralized strategic sourcing group to manage these long range plans (the group contains some math-savvy planners – i.e., industrial engineers rather than just business undergrads). The company also had to clearly explain to factory managers, at its annual planning meeting, the reasons behind its sourcing decisions.

You can’t argue with success. Over five million dollars in annual savings—now that’s how I spell “ROI”!

(Note: JDA Software is an ARC client)

Leading Food & Beverage Manufacturer Implements Mobile Resource Management Solution to Improve Merchandising

Food & Beverage Industry | By Steve Banker • 03/21/2011

At the Descartes User Conference last year, a leading food and beverage manufacturer spoke about its implementation of a Mobile Resource Management (MRM) solution from Descartes (an ARC client). At a high level, the manufacturer’s goal was to improve its merchandising and store delivery operations.

Like other CPG companies, this manufacturer employs merchandisers (about 10,000 US sales reps and full and part-time merchandisers) to make sure that its products are stocked and displayed properly on store shelves; ensure that displays are deployed; get new product introductions on the shelf in a timely manner; and other related activities. For direct store deliveries (DSD), the logistics and merchandising teams need to collaborate. When a pallet of goods is delivered to a store, it is the merchandiser’s job to meet the truck and get the goods to the front of the store.

This manufacturer’s history with Descartes dates back to 1999 when it implemented a routing and scheduling solution for its DSD fleet. Around that time, the company had also tested various GPS solutions to track its DSD fleet and vehicles used by retail operations, but none of them met its needs. In 2007, the company began a GPS retail pilot with Descartes on a limited basis. Sprint was the mobility partner for this project, and the solution was integrated with the company’s ADP payroll solution.

The company expanded the pilot in the first half of 2008, and the ROI it achieved justified rolling out the solution nationally. The company’s specific goals for this project were:

To reduce the amount of paperwork its managers had to process and give them more time to spend in the field (about one more day per week) to interact with and train their merchandisers;
To enhance productivity and improve the company’s ability to accurately track what its workforce was doing;
To provide a platform the company could use in the future to build better route development, delivery scheduling, and workload modeling.

From an ROI perspective, more accurate labor reimbursements helped to pay for the project and support the goals that were more difficult to model from an ROI perspective. The company’s merchandisers were paid based on the hours they worked and reimbursed for the miles they drove. Prior to the implementation of the MRM solution, this was based on self-reported data–i.e., merchandisers would call into voice response units to report their hours. Not surprisingly, some exaggeration in reported work hours was occurring.

Although the company did not disclose specific savings, it did say that after implementing the solution in a particular region it experienced almost a double-digit percent reduction in hours reported (which implies close to a 10 percent reduction), and reported miles driven decreased by almost double that amount (i.e., an almost 20 percent reduction). In addition, the system provides supervisors with actionable data–i.e., they can see, for example, if a merchandiser stops for 20 minutes at a fast food restaurant at 10 am. Finally, this data allows the company to have much better operational data for ABC customer profitability analysis, workload modeling, and the creation of labor standards.

There is also something in it for the merchandisers. By logging into a web-based portal, they now have accurate visibility to what they will get paid.

Other MRM pilots had not been successful, but what made the difference in this case was the integration of the GPS data with payroll. Workers don’t get paid if they don’t activate the GPS tracking. The other critical success factor was making sure managers review the data (at least twice a week for a half hour) and act on it. In short, payroll automation was the ‘hook’ that drives usage, while the GPS data is the “truth serum” that provides accountability.

What Affects Point of Purchase, Affects the Supply Chain

Consumer Packaged Goods (CPG) | By Steve Banker • 11/30/2010

In consumer goods to retail supply chains, what affects the point of purchase, affects the supply chain. This has always been true, but with shelf-level collaboration and demand-driven programs expanding, it is even truer today. With that in mind, I reached out to my media contact at the SymphonyIRI Group to get a copy of a report they published earlier this year called “Price, Promotion & Merchandising: Balancing the Call Between Value and Price Relief”.

Procter & Gamble’s former CEO, A.G. Lafley, made famous the “two moments of truth” concept. The first moment of truth is what a consumer sees on the store shelf; the second is what the consumer experiences after they have bought the product (see related postings here and here). But one of the insights I got out of SymphonyIRI’s report is that the recession is shifting that first moment of truth. SymphonyIRI’s research shows that whereas “in 2007, 60 percent of consumers were making consumer goods purchase decisions at home, that number has escalated sharply. In 2010, 83 percent of shoppers are making purchase decisions before entering the store,” most prominently by making a shopping list at home prior to going into the store.

This does not mean, however, that there will be less merchandising. As the report states, “Today, two-thirds of categories achieve lift of 50% of more from CPG merchandising efforts, while one-quarter actually see lift levels above 100%.” But what it does mean is that “marketers absolutely must reach consumers in the home. The success of feature advertisements reinforced by display is undeniable proof of the importance of monitoring and marketing” against this critical consumer trend. In short, CPG supply chains need to continue to have the ability to surge to support promotions.

Another trend is less surprising: “With a solid reputation for value and quality, store-brands are well-positioned to compete in a recessionary environment.” The most important factor in selecting a product is its overall quality, listed by 92 percent of respondents as being “important” or “very important.” The second biggest factor is the item’s price, listed by 87 percent of shoppers. But just because quality was ranked higher than price does not mean CPG manufacturers are not affected. “Retailers and private label manufacturers have done a remarkable job of bringing high quality store brand options to market.” Store brands are also often a key differentiator for retailers, “and they generally carry a higher margin versus national brands.”

What does this mean for CPG manufacturers? It means that shelf-level collaboration is more important than ever. When a product is not in stock on the shelf, consumers buy a different brand about 26 percent of the time, according to some statistics I have seen. If they buy a high quality private label, that consumer is very apt to never again buy that product from the CPG manufacturer.

At our upcoming seminar in February—“Beyond the Perfect Order Metric: Bringing Together Supply Chain, Category Management, and Mobile Technologies to Improve On-Shelf Availability”—we will explore how supply chain, marketing, and merchandising must develop better collaboration strategies to drive better on-shelf performance.

[Editor’s Note: Don’t wait until it’s too late to register for the seminar! Register by December 30, 2010 and pay only $995, a $200 savings off the regular price. Space is limited, so if you have some money left over in your 2010 budget, invest part of it in attending this seminar, where you’ll network and learn from your peers, such as Del Monte Foods, Sony Electronics, Whirlpool, Kraft Foods, and others, about this timely and important topic. Visit the seminar website for the latest agenda and to register.]

Walmart’s ‘Win-Play-Show’ Assortment Strategy

Inventory Management | By Steve Banker • 07/23/2009

Eric Peters, the CEO of TrueDemand Software, was in to brief us recently. During our conversation, Eric commented that many folks believe Walmart is performing well financially because low-cost retailers tend to have a competitive advantage during a recession. However, he believes Walmart’s recent gains in logistics efficiencies are also contributing to the company’s financial success. As an example, Eric highlighted Walmart’s “Win-Play-Show” assortment strategy, and he pointed me to a presentation given by Bill Simon, COO, Walmart U.S., at Morgan Stanley’s Retail Conference in April (you can read the transcript here).

Win-Play-Show is really a merchandising strategy that has beneficial synergies with logistics. In a “show” category, the company carries fewer SKUs than it has in the past. A “show” strategy is a defensive approach that limits product selection but does not cause a buyer to go somewhere else for a product. In “win” categories, price leadership is deemed absolutely critical, along with having more pronounced and well-positioned displays in the stores. This program has led to a reduction in the number of SKUs available in stores, something the folks in logistics always appreciate. Walmart supplements and expands the product assortment in its “show” categories through Walmart.com, where customers can order products online which are delivered to a nearby store for the customer to pick up.

Another Walmart initiative is to clean up the “look and feel” of its stores-i.e., make them less cluttered and look more like (to my eyes) Target stores. These revamped stores will carry even fewer SKUs than traditional stores that have not yet received a makeover. It will take Walmart about five years to makeover all of its U.S. stores.

Not surprisingly, having fewer SKUs, and selling higher volumes of them, results in more accurate forecasting and lower inventory levels. In its U.S. business, Walmart had a 6.8 percent increase in annual sales in FY 2008, yet it was able to reduce inventory by 1.2 percent. But the company believes these programs-fewer SKUs leading to less cluttered departments, combined with bigger, bolder price signage-also resulted in other business benefits, such as increased sales, fewer markdowns, and higher margin. For example, Walmart’s pet category (a “show” category) grew by double digits.

In Walmart’s financial presentations, the company talks about supply chain almost as much as it does about store operations and merchandising. For example, in his presentation, Simon commented, “Last year in a very, very difficult, up-and-down year…diesel went as high as $4.90…in some parts of the country and then dropped back down by the end of the year. Our logistics operation delivered about $200 million in savings to the group, and they did that through routing, reloading trucks, fuel efficiencies in how we drove, adding auxiliary propulsion units…no magic bullet[s]…except a lot of hard work and a very, very efficient organization.”

(I’ve heard through the grapevine that routing efficiencies have been aided by Walmart’s implementation of Manhattan Associates‘ TMS on the inbound side, while the company continues to use JDA‘s TMS on the outbound side. I’d love to know which GPS/telematics solution Walmart uses, but none of my sources knows. GPS/telematics enables increased fuel efficiencies based on better monitoring and coaching of drivers.)

Meanwhile, Walmart is eliminating empty miles in its produce category. In combination with a more structured replenishment process (in line with the way the company manages most of its other product categories), Walmart launched a program last October to increase the amount of produce it buys from local sources. This action has eliminated several days from its produce supply chain and has reduced the number of miles traveled, which also benefits Walmart’s sustainability objectives.

These inventory reductions has enabled to Walmart grow its sales without having to invest capital in building new distribution centers. As Simon commented, “Because we’ve rationalized SKUs and focused our energy on ‘win, play, show’ categories, because we have less inventory in the stores, it’s easier for us to find and stock the shelves [and] order the products that we need from the distribution center. And so reduction in inventory has resulted in higher in-stocks, not lower in-stocks.” This also means better labor productivity. Overall, labor productivity was up by about 3 percent and backroom productivity, which is measured as cases received per backroom labor hour, was up over 8 percent.

Walmart has always been one of the exemplars of supply chain excellence. What is interesting to me is how the company is blending merchandising and supply chain improvements to achieve benefits in both areas.

RFID: Supply Chain vs. Merchandising Visibility

Inventory Management | By Steve Banker • 04/16/2009

More than six years ago, WalMart announced a new EPC RFID mandate. RFID was going to revolutionize the supply chain, leading to better visibility for suppliers and reduce out-of-stocks for retailers. That was the vision. However, when I interviewed twenty-four of the top 100 suppliers that were mandated to participate, I heard a different story. Costs would be shifted from WalMart to suppliers; supplier processes would become less efficient; and any benefits suppliers might achieve were, at best, several years out.

Consequently, amidst a storm of hype and inflated projections, no analyst group voiced more skepticism about mandate-driven RFID than ARC. And one of our customers, who had asked us to conduct this study because they were considering a significant investment in RFID, saved themselves tens of millions of dollars.

Soon after my analysis was complete, and I concluded that the EPC RFID market was not going to become a major factor in supply chain management in the near to medium term, I stopped paying close attention to the market and its players. Then last week a press release crossed my desk from Checkpoint Systems announcing the “World’s First Source-to-store Merchandise Visibility Solution” that includes RFID software and tags. I wondered what the difference was between supply chain visibility and merchandising visibility, so I gave them a call and asked for a briefing.

It turns out that Checkpoint Systems acquired OAT Systems last June (OAT was one of the RFID start-ups that received a fair bit of publicity during the hype phase). Further, the story Checkpoint told me surrounding RFID for “merchandising visibility” in the fashion apparel supply chain makes a lot more sense than using RFID to track low-margin commodity products.

To understand why this new RFID solution makes more sense, it helps to have some background on Checkpoint Systems. They are one of the leading providers of Enterprise Article Surveillance (EAS) solutions-i.e., those little theft-prevention tags that are placed on garments, as well as the tag readers and the accessories to remove or deactivate the tags.

Checkpoint Systems Reusable Tags and Sensor Gate (Source: Checkpoint Systems; click for larger view)

In many cases, the retail apparel supply chain starts in China where the clothes are manufactured. The manufacturers are often required to put EAS tags and price tags on the clothes at their factories. Checkpoint Systems has an on-demand source management solution that allows retailers to specify what products they want tagged and at which factories. Checkpoint then sends the tags to the manufacturer, provides the EDI and computer-based proof of delivery, and facilitates electronic payments.

This is where RFID comes in. Many apparel products are higher margin products, so it’s easier to justify the added cost of RFID in this supply chain. Also, tagging is already occurring at the factories. By providing a tag that combines EAS, RFID, and perhaps even price, you are not creating additional work. Once the product arrives at the stores, the RFID process typically includes putting readers at the back of stores to track the receipt of goods. Another reader can be located between the backroom and the front of the store to track the flow of inventory to and from the selling area. Handheld RFID readers can also be used to conduct a weekly cycle count, which according to Checkpoint, can be performed ten times faster than doing it manually. Finally, POS systems track retail sales.

One of the things I learned when I conducted the EPC RFID study is how horribly inaccurate store-level inventory systems are. For many retailers, inventory accuracy at the store level is 65 percent or worse. Without good store level inventory accuracy, retailers will always have replenishment problems. For example, inventory systems typically do not account for stolen goods. The inventory system may show that a particular style and size garment is in stock, but just not selling. Consequently, it is not reordered. This is where the combination of RFID and EAS makes sense to me. In combination with the weekly cycle count (which would not be practical without RFID handhelds), the net result is higher inventory accuracy at the store level. Retailers are now able to distinguish between true out-of-stock situations and cases where inventory exists at the store, but it’s just not on the shelves.

Checkpoint admitted that RFID accuracy is still not 100 percent, although it is far better than it used to be. For example, if a store employee comes out of the backroom with an armful of garments, the RFID reader might not just read those garments, but also the garments in the selling area. This is the RFID read point that causes the most problems. In contrast, Checkpoint says that the shelve-level cycle count is almost 100 percent accurate. However, even at this backroom/front room cross over point, they can still achieve somewhere between 95 and 99 percent accuracy, which in combination with weekly cycle counts, is still far better than what could be achieved before.

Further, the price of RFID tags has come down substantially. Five years ago, the all-in volume buying price was over $1 per tag. Now, in volume buys, the price for adding RFID to the EAS tag is less than $0.25.

So what is the difference between “merchandising visibility” and “supply chain visibility”? Checkpoint argued that since their RFID solution extends all the way to the point of sale, it was a merchandising solution. I think the only difference is that Checkpoint’s primary customers are the folks responsible for retail store operations, who have long purchased their EAS solutions, instead of the supply chain group.

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