Shortening the Supply Chain
"Any fool can make things bigger, more complex, and more violent. It takes a touch of genius - and a lot of courage - to move in the opposite direction."
--Albert Einstein
Increasing labor, real estate, and transportation costs have historically pushed the grocery industry to look for ways to reduce the cost of getting product from the manufacturing facility to the consumer, usually measured in cost per case. The Consumer Packaged Goods (CPG) industry has had an evolution of initiatives focused on simplifying the supply chain in an effort to reduce costs. All of these initiatives talked about streamlining the supply chain, but they accomplished little more than improving the efficiency of the existing supply chain model that was developed in the 1950’s. The end result is that only one week of inventory, or about $0.03 per case, has been eliminated from the supply chain.
In the early 1980’s, the industry focused on “Just-In-Time” (JIT) as the solution. The concept was to move inventory to the next point in the supply chain as it was required for consumption or use. In its widest context, JIT is also used to describe the philosophy of short lead times and low inventory levels within the supply chain. While the concept was good, the supply chain infrastructure was not in place to economically move quantities in less than truckloads. Each manufacturer had their own supply chain network so, to keep transportation costs down, retailers had to buy a truckload of product from each manufacturer. The “Economic Order Quantity” (EOQ) of a truckload was not small enough to provide the desired benefits promised by JIT solutions.
In the early 1990’s, the focus shifted to “Efficient Consumer Response” (ECR) as the way to take $30 billion of costs out of the grocery supply chain. Inspired by threats from new store formats such as discount stores, supercenters, and “category killers” (stores focused on selling a limited line of products, such as pet supplies, at deep discounts), traditional grocery chains began to re-examine supply chains for ways to eliminate costs. ECR was born as the industry strategy aimed at eliminating inefficiencies, and non-value added costs within the supply chain. The goal was to reduce the costs to the consumer by changing the way product flowed from manufacturers to retailers. The order flow, at the time, was driven by the manufacturers, not by consumer demand. The recomendation was to change to:
A “push system” in which manufacturers “push” products into stores with a “pull system,” in which products are “pulled down the supply chain into the store by consumer-demand information captured at the point of sale (Kurt Salmon Associates 1993).1
Mixing Center Supply Chain Model
The ultimate goal of ECR was to reduce costs through the development of a responsive, consumer-driven system based on the collaborative efforts of manufacturers and retailers. The $30 billion dollars in savings were to be achieved by reducing nodes in the supply chain and eliminating the costs associated with those nodes. The ultimate solution would be automated, continuous replenishment of the shelf directly from the manufacturing facility.
While ECR increased the level of collaboration between manufacturers and retailers, it could not overcome the fundamental hurdle of how to cost effectively get a case of product from the production line to the store shelf. Most large manufacturers created “mixing centers” (MCs) where product from all of their manufacturing facilities was shipped. In this model, the retailer could order a truckload of product, across all of the manufacturer’s product lines. The truckload of mixed products was then shipped to the retail “distribution center” (DC) for selection into store orders and distribution, with product from other manufacturers, out to the stores.
The addition of the MC node in the supply chain helped to reduce the EOQ from a full truckload, shipped from a single manufacturing plant, to a truckload of all items sold by the manufacturer. This improved the efficiency of getting fast-movers to the shelves, but still made it hard to get slow movers through the supply chain in time to avoid out-of-stocks (OOS) on the shelf. If a slow-mover (an item ordered in a pallet or less) is out-of-stock, the retail buyer has to wait until there is sufficient demand for the fast-movers to allow the creation of a full truckload order. In this case, the EOQ is still out of line with the demand quantity. The result is inefficiencies in the supply chain and lost sales.
In the beginning of 2000, the new initiative was “collaborative planning, forecasting, and replenishment” (CPFR). This was a cross-industry initiative that was designed to increase collaboration through sharing of the planning and forecasting process. Again the focus was on getting product to the shelf when it was needed. The initiative improved the information flow, but did nothing to change the fundamental economics of today’s grocery supply chain.
In 2002, ES3 introduced the concept of the “Really Big Consolidated Warehouse” (RBCW). Unlike JIT, ECR and CPFR, this was not an initiative focused only on collaboration or information enhancements but one that was aimed providing the infrastructure to cost effectively change the EOQ for the CPG industry. In other words, the RBCW addresses the economics of the supply chain that had kept the other initiatives from achieving their professed savings.
The RBCW combines multiple manufacturers’ supply chains into a single, very large supply chain. This scale allows the reduction of the EOQ from a truckload to a case. Additionally, this scale changes the delivery timing from 5 days to 24 hours or less. These changes in the supply chain facilitate the goals of the previous initiatives to replace product on the shelf just-in-time to avoid out-of-stocks in a more efficient, and cost effective, way than individual manufacturer and retailer supply chains.
1 Kurt Salmon Associates (1993). Efficient Consumer Response: Enhancing Customer Value in the Grocery Industry, American Meat Institute, Food Marketing Institute, Grocery Manufacturers of America, National Food Brokers Association, and Uniform Code Council.