OSHAWA IS MOVING TO RE-ENGINEER ITS SUPPLY SYSTEM

MARC MILLSTEIN

CHICAGO -- Oshawa Foods' ambitious logistics vision calls for revamping its entire supply chain system to meet a new set of customer requirements.

The distributor, for example, is determined to see that products, including direct-store-delivery items, are delivered to stores as often as necessary on weekends, when 40% of business is now conducted and out-of-stocks run as high as 11% in some categories.

Oshawa is set on guaranteeing that perishables items, especially produce, take no longer than 20 hours to wind through the total supply chain and arrive at the store, thus ensuring exceptionally high levels of product freshness to meet customers' growing demands for quality.

The firm also is seeking to achieve Efficient Consumer Response supply-chain inventory-reduction goals based on the European model that envisions cutting average days of inventory from 42 today to 26 rather than the North American model of 104 days to 61.

Those were among the formidable supply chain strategies highlighted by Mike Smith, vice president of integrated logistics at Oshawa Foods, Mississauga, Ontario, at the Food Marketing Institute's annual convention here. Smith spoke at a workshop titled "World Class Replenishment: The Competitive Edge."

To accomplish those goals, Oshawa Foods, which generates about $1.8 billion in annual sales through both franchise and corporate stores, signed a long-term contract with third-party operator Tibbett & Britten Group Canada, Etobicoke,

to handle its logistics operations.

Under the arrangement with the third-party firm, Oshawa sold off its distribution centers, materials handling equipment and transportation fleet and also agreed to lease out buildings.

In return, Smith said, Oshawa gained a long-term partner capable of propelling the distributor fast forward in enacting a wide range of programs to meet growing consumer and retailer demands for better product freshness, shorter lead times and lower costs.

"Clearly, we're paying a premium," Smith said in response to a question from the audience about the added costs of using a third-party provider, "but we anticipated that paying the premium would reap benefits in the future."

Among the joint initiatives Oshawa is focusing on is cutting supply chain inventory levels, streamlining product flow and moving all products via continuous replenishment programs.

One approach has involved moving to contract pricing arrangements with suppliers.

"We're now contracting prices out for six months or a year. There's still opportunity for promotional products but with fewer large peaks and valleys. Since January we've been able to reduce our inventory by 25%. We've been able to take out about $12 million in inventory in four months," Smith said.

Oshawa is also moving aggressively to ship all products via continuous replenishment programs.

"Right now 20% of our stockkeeping units are controlled through vendor-managed CRP, and that's been very successful for us. We're also involved in retailer-managed CRP. We anticipate by next spring having all our suppliers on managed programs, either vendor- or retailer-managed. The right mix is probably about 50%-50%," he said.

Oshawa, however, thus far has implemented only about 40% of the logistics programs it envisions, with the most sweeping changes yet to come.

The distributor, for example, is now tackling the crucial issue of providing weekend delivery of products -- especially perishables and direct-store-delivery items -- to ensure greater product freshness and dramatically reduce out-of-stocks during one of the busiest shopping periods of the week.

"Sunday is now the second largest sales day of the week in Canada, yet deliveries on Saturday afternoon and Sunday are not considered cost effective. Also, on Sunday, out-of-stocks on DSD run about 11%. When we're trying to run a business with 1% and 2% sales increases and have 11% out-of-stocks, I think we have to change the system," Smith said.

"Our first area of attention for the next six months will be to work with our third-party operator to deliver goods on Saturday afternoon, Saturday evening, Sunday morning first thing, and Sunday late morning -- at no additional cost," he said.

Smith also outlined his vision for building a network of specialized distribution centers, including facilities to handle slow-moving items as well as high-volume products.

"If you look at the 80%-20% rule, it's clear we're focusing our energies on million-square-feet facilities to receive, store and deliver [many of] those slow movers. The days of the full-service distribution center of more than 500,000 square feet are ending. When you have volume such as in our case, in which 19.7% of the SKUs represent 68% of volume, it doesn't make sense to build such large facilities," he said.

Instead, a new distribution network, featuring a facility to handle slow-moving items that would be cross-docked to regional centers, could be developed. "The slow-moving items would be one delivery per week, usually the slowest day in the warehouse," he said.

Some of Oshawa's sweeping logistics plans are also about to take shape in the form of a new perishables distribution center.

"We're in the position of adding a new perishables facility for meat, produce and milk. Product will be cross-docked at regional DCs and the [system] will dictate that no fresh produce item be in our system more than 20 hours. Product lead times for perishables also will be reduced, to 18 hours or less," Smith said.