While seemingly straightforward on the surface, food retailing is a fairly complex business when all of its variables are taken into account.
This complexity becomes readily apparent when executives from different disciplines within food retailing talk about ways to make the business more efficient, as they are wont to do during difficult economic times such as we are now experiencing. They come up with competing and contradictory ideas that can make finding efficiencies more elusive than ever.
Here's an example of what I mean. In last week's SN, I wrote about the In-Store Implementation Sharegroup, a small group of retailers, manufacturers and industry experts who have identified gaps in the implementation of merchandise plans and promotions at the store level. The share group estimates that these gaps cost food, drug and mass retailers between $10 billion and $15 billion annually.
One member of the share group, Ray Smaltz, vice president of grocery category management for Giant Eagle, Pittsburgh, attributes the implementation problem partly to store employees performing too many unnecessary tasks, many of which are created by erratic store deliveries. He argues that store deliveries need to be more frequent and uniform, based on daily store orders. This would not only help employees do their jobs better but would also improve in-stock conditions at the shelf.
Giant Eagle itself now orders 60% of its dry grocery products seven days per week. And the chain has shown in its partnership with General Mills that increasing store orders and deliveries sharply reduces out-of-stocks and boosts sales. That sounds great, except that in 2008, there is another major factor at play: Diesel fuel prices have soared to $4 per gallon — up from $3 per gallon just six months ago — making transportation a lot more expensive. Do we really want to increase deliveries?
Last month I covered a presentation at the FoodInstitute's Supply Chain Conference given by Robert Mooney, group vice president, wholesale and manufacturing for Meijer, Grand Rapids, Mich. He argued for cutting back on store deliveries because of the cost of fuel, noting that a 4.5% reduction in shipments yields greater savings than all the fuel-saving technological advancements of the past 20 years.
So which should it be? More frequent store deliveries, which lead to better store performance and fewer out-of-stocks, or fewer store deliveries, which saves a bundle on fuel costs? You can't have it both ways.
Somewhere there is a formula that takes all of these factors into account and comes up with an optimal number of deliveries. But even that number probably wouldn't satisfy everyone in the Smaltz camp and everyone in the Mooney camp.
One thing is clear: Category managers and logistics managers need to emerge from their silos and acknow-ledge that the other party has a point of view — and then try to reach a compromise that ultimately benefits the business as a whole.
Given the current cost of diesel fuel, any compromise will have to make transportation costs part of the equation in determining the number of store deliveries, along with shrink, freshness and out-of-stocks.