THE TIMES THEY ARE A-CHANGIN'

MICHAEL GARRY

America's famed troubadour Bob Dylan sang about changing conditions in the 1960s, and added an indelible phrase to the vernacular: The times they are a-changin'. It's certainly a description that can be applied to the state of the food-distribution industry today in the areas of supply chain and logistics.

Consider the changes distributors, both self-distributing chains and wholesalers, are facing now: new technologies making dramatic changes in warehousing and transportation, such as voice-picking and global-positioning systems; major initiatives affecting the way trading partners interact and collaborate, such as UCCnet; the continuing impact of the Internet on electronic data interchange, collaborative planning and replenishment and (for wholesalers) links to retailers; the need to scan bar codes used outside of North America; and a new and evolving system of product identification that may replace the bar code one day.

That list doesn't include the growing specter of competition from Wal-Mart and a slowly recovering economy, not to mention an international climate forcing distributors to make sure their supply chain is secure from terrorists.

Yes, there's plenty of grist for the mill as food distributors gather for the 2003 Food Industry Productivity Convention & Exposition, to be held Oct. 26 to 28 at the Gaylord Opryland Resort & Convention Center, Nashville, Tenn. Even the convention is undergoing changes as Food Marketing Institute becomes its main co-sponsor with International Foodservice Distributors Association (see story, this page).

To get the ball rolling, SN thought it appropriate to once again assemble a roundtable panel of food distributors and experts to explore some of the more pressing supply chain and logistics issues. This year, a self-distributing chain -- Giant Eagle -- was added to reflect the changing nature of the Productivity Convention, formerly focused more on the wholesaler community.

The panel, which contributed responses online, includes: Carl D. Marks, vice president and chief information officer, and Lewis R. "Randy" Fletcher, vice president, logistics and supply chain management, Associated Grocers -- Baton Rouge, La.; Gene Puhrmann, CIO, Associated Grocers, Seattle; Bill Parry, vice president, logistics, Giant Eagle, Pittsburgh; Ron Griffin, co-partner, Griffin Anderson, Atlanta, and former CIO, Fleming and Home Depot; Richard Kochersperger, president, Food Marketing Group, Wallingford, Pa.; and Jack Haedicke, president, Arena Consulting Group, Eden Prairie, Minn., and former vice president of finance and ECR, Kraft.

SN: What are the most important issues facing food distributors today?

Marks & Fletcher: Effectively competing with Wal-Mart and national chain networks by enhancing efficiencies, controlling costs, leveraging technological capabilities, and preparing and enabling downstream retailers to accentuate their niche in the marketplace. Furthermore, the recruitment and retention of quality personnel remain huge issues in our industry, at wholesale and at retail.

Puhrmann: Escalating labor costs for benefits and competition with Wal-Mart and Winco. There has been a contraction of the retail sales base as Wal-Mart expands.

Parry: Sharing of accurate, timely information and the continued proliferation of stockkeeping units.

Griffin: Improving the quality of information between trading partners, which will result in significantly improved execution and cost reductions. Therefore, participating with UCCnet is a critical foundational element. Dealing with promotional programs accurately and efficiently could be hugely beneficial.

SN: What were the big changes distributors have made in the past year in warehousing and transportation systems?

Marks & Fletcher: Without a doubt, there were five changes and events that most impacted our operations and operational technologies this past year. First, the migration of our buying/procurement systems peripherals from a mainframe to a Unix platform. Second, the successful implementation of voice technology in our distribution center. Mispicks are down 65% on a consistent basis, and shorts are down significantly as well.

Third, virtually full deployment of our Feline retail store ordering system (using handhelds). This has resulted in a 40% reduction in retail order error.

Fourth, the Fleming situation resulted in an unprecedented opportunity for our company to expand our presence in the marketplace, and grow our sales volume. Our year-to-date volume is 21% above this time frame last year.

Fifth, we have developed a process for tracking, monitoring and evaluating the success of marketing campaigns through the collection and analysis of POS data.

Puhrmann: We outsourced transportation to a third-party provider (Ruan).

Parry: We implemented a new inbound transportation management system (from G-Log), with high importance placed on visibility. Our warehousing continues to focus on labor standards and incentives.

Griffin: Implementing voice-directed selection has been very beneficial to companies in terms of labor savings and accuracy. And pro-active management of transportation (such as load planning, route management, backhaul management, etc.) continues to deliver significant savings.

Kochersperger: The integration of technologies in the transportation function, including radio frequency for controlling asset movements and handhelds for driver reporting and documentation.

SN: Are distributors looking at ways to secure their food supply from potential terrorist acts?

Marks & Fletcher: From a security standpoint, we are extremely diligent and prudent in safeguarding the integrity of product upon receipt, through storage, and in shipment to retail. We have also been very diligent in our hiring practices to ensure that security breaches are unlikely.

Parry: We have for some time now been examining opportunities to ensure that our customers are receiving the freshest, safest, highest-quality food selection.

Griffin: I think most distributors have a contingency plan in place.

Kochersperger: The food supply chain is based on trust. Most of the regulations being discussed will cost the American taxpayer dearly, and offer little or no more protection from outside influences.

SN: How have distributors fostered collaboration with trading partners this year?

Marks & Fletcher: We continue to make adjustments and changes necessary to comply with the efficiency standards of our trading partners so as to maximize any and all opportunities to lower cost-of-goods, and deliver better value to the consuming public. Furthermore, through our memberships in various trade associations, we have leveraged collaborative efforts to negotiate lower costs and better terms for equipment, supplies and certain commodities.

Puhrmann: We have been working with Western Family Foods, as well as contacts established via the Food Marketing Institute.

Parry: Giant Eagle is actively searching for a vendor to create a strategic partnership with. We are looking for the "Perfect Vendor" to become a part of our structure and be proactive to anticipating industry trends.

Haedicke: I believe that the level of collaboration between distributors and trading partners actually declined in 2003. Faced with margin erosion from competitive pressures, increased operating expenses from labor negotiations, the bankruptcy of Fleming and -- lest we forget -- confusion on how to book the most basic of accounting entries, most distributors turned inward in an attempt to get their own house in order. However, I also believe that distributors understand that the only way to reduce total supply chain cost for the consumer is through collaboration with trading partners and that we should see an increase in 2004.

Kochersperger: In reality, only a few players are making the effort (to collaborate), and there is limited application because the manufacturers and distributors don't trust one another.

SN: What are distributors doing regarding data synchronization?

Marks & Fletcher: We continue to evaluate the advantages of UCCnet membership. We have not yet subscribed, but will ultimately do so based on the following: First, we are convinced of the value proposition; a significant number of our trading partners would need to be UCCnet subscribers and utilize this as their registry of product information. Second, our internal systems must be ready for acceptance of UCCnet-based information. Third, it has to be obvious to us that there are competitive advantages to subscribing.

Puhrmann: We plan to subscribe to UCCnet this year.

Griffin: Any trading partners not (subscribing to UCCnet) will soon be at a competitive disadvantage. Ease of doing business with someone will be a key differentiator. The home improvement industry is fast leap-frogging food, and will likely be the model industry in the near future. The food industry needs to accelerate its pace.

Kochersperger: Having a central depository for (data synchronization) has been very difficult to accomplish. Private networks seem to be the short-term and maybe the long-term solution.

SN: Are distributors pursuing AS2 EDIINT (Web-based EDI) as a replacement for conventional EDI?

Marks & Fletcher: We have evaluated some EDIINT alternatives, but, to date, we continue to utilize traditional EDI tools in conjunction with the Sterling Commerce VAN. Many companies in our industry have invested heavily in traditional EDI enablers, and are thus reluctant to scrap those investments for EDIINT solutions, particularly given that upstream trading partners likewise rely upon the traditional model. However, with Wal-Mart's announcement that suppliers must adopt EDIINT, perhaps our industry will move more quickly to this alternative. In the interim, we will continue to utilize traditional EDI.

Parry: AS2 EDIINT should function as an alternative.

Griffin: I think the biggest shift you will see this year is the rush between trading partners to go to Internet-based trading vs. proprietary VANs. Both parties will gain significant savings. A year from now, people who haven't done it yet will have to explain why they haven't done it.

SN: Are distributors using B2B Web exchanges?

Marks & Fletcher: We are not using B2B Web exchanges, although we are reviewing a solution provided by OMI International called Novopoint. We do participate in B2B reverse auctions facilitated by EC Markets.

Puhrmann: We do not use them, but we do plan to evaluate opportunities in 2004.

Parry: We use them on a limited basis.

Haedicke: I don't believe they are using them to any great extent. The notable exceptions are collaborative sourcing (buying at scale that none could achieve alone) through WWRE and GNX.

Kochersperger: B2B Web exchanges are being utilized for commodity-type products only. Most vendors do not like auctions/exchanges because it makes the product lines commodities, which are always sold on the lowest price.

SN: Are distributors making communications with their retail customers more efficient? Marks & Fletcher: We have invested heavily in the development and deployment of AG LINK, which is our company's B2B solution with our downstream retailers. Furthermore, we have a secure, members-only part of our corporate Web site, through which we communicate timely information to our retailers, such as software downloads, recall notices, new items and an ordering system for new items. Furthermore, we utilize e-mail heavily with our retailers.

Puhrmann: We have regularly scheduled Retail Advisory Board sessions. In addition, we have implemented an executive calling program (face-to-face sessions at customer locations), and conduct regularly scheduled business reviews with customers.

Parry: We continue to examine techniques to maximize the efficiency of communications/logistics with our stores, which is highlighted in our overall logistics strategy.

SN: Are distributors ready for 2005 Sunrise, that is, Jan. 1, 2005, when they are expected to read non-UPC bar codes?

Marks & Fletcher: We have a cross-functional team of individuals focused on the requirements of 2005 Sunrise. We have identified all internal systems that require modification, and have inventoried the hardware and software solutions deployed at retail. We are in the process of preparing a simple guideline of requirements for our retailers to follow in terms of technology replacements and upgrades. We and the retailers that we serve will certainly be GTIN-compliant by Jan. 1, 2005.

Puhrmann: AG Seattle and our retailers will be ready for 2005 Sunrise.

SN: Are distributors interested in testing EPC (electronic product code) chips and readers on cases and pallets, using radio frequency tools, as Wal-Mart is doing?

Marks & Fletcher: We will be closely monitoring the results of pilot programs initiated by OMI International with some of its clients regarding RFID (radio frequency identification) at the case and pallet levels. We believe that Wal-Mart's mandate will compel our industry to adopt this technology quite aggressively over the next 18 months; and we will certainly prepare to be an early adopter. We will reserve judgment on product-level EPCs, as we believe this will come later.

Puhrmann: We plan to test this in the future.

Griffin: My personal preference would be to let others get bloody working all the kinks out, and then come in as an adopter once the "water is safe." Having said that, I would pioneer RFID on specific, narrow focus areas where there could be huge paybacks. This way, I could get the highest return on investment, even at current chip prices. These killer apps would help pave the way for the infrastructure investments. That could lower the investment hurdle for secondary apps.

Kochersperger: There is significant interest in EPC. However, the major manufacturers have committed to working with the dominator -- Wal-Mart -- so it seems unlikely that small food distributors will play much of a role in its development.