Perfect Storm

MICHAEL GARRY

As supply chain professionals convened at the beginning of this month for the Food Marketing Institute's Supply Chain Conference, held in the picturesque resort community of Palm Springs, Calif., the weather could not have been more serene. Yet as far as industry trends were concerned, conference attendees found themselves grappling with a perfect storm.

In addition to facing the general economic downturn, these distribution executives — who oversee the trucking fleets of their companies — were reeling from extraordinarily high diesel fuel costs.

At many sessions, references were made to diesel costs that have soared to $4 per gallon — up from $3 a gallon just six months ago, and $1.60 a gallon four years ago. In addition, several other trends don't bode well for food retailers, as noted at the conference by Robert Mooney, group vice president, wholesale and manufacturing, Meijer, Grand Rapids, Mich.

“Drivers are being paid ever-higher wages while driving larger trucks, delivering smaller cases more frequently, as the price of fuel goes to unimaginable levels,” he said. “Is there a problem here somewhere?”

Though the conference offered no “silver bullet” solution, it did provide a number of ways food retailers can address escalating transportation costs.

One way to rein in the cost of transportation is to simply put fewer trucks on the road, although the average number of deliveries per week to stores grew to 4-6 per week in 2007 from 2-4 per week in 1987, said Mooney.

Over the past few years, Hy-Vee, West Des Moines, Iowa, has been striving to eliminate one delivery per week to each of its more than 220 stores. “It's easy to get out of whack on the number of deliveries needed to take care of [store] requests,” said James Moore, assistant vice president, transportation, for Hy-Vee, who participated in a transportation efficiency panel at the conference.

Hy-Vee set a policy whereby a store has to average a specific minimum weight per delivery “or they are asked to reduce their delivery schedule,” said Moore. This resulted in new schedules in January 2006, most of which are still in effect. Averages are reviewed at the end of each quarter, and exceptions are made for special events, holidays or new competition.

Using dynamic routing software that was deployed in late 2005, Hy-Vee makes sure that trucks that are sent out take the most cost-effective route. In addition, load planners focus on getting trucks “as full as possible,” said Moore.

Between 2005 and 2007, Hy-Vee increased the average weight of its store-bound deliveries by 6.7% and the average cube (volume) by 10.3%. Its total delivery tonnage grew during that period by 13.7%, despite just a 0.5% increase in loads and a 1.1% increase in miles driven.

In 2006, Hy-Vee started purchasing a 5% blend of soy biodiesel fuel, and the company is now using 130,000 gallons of the blend annually. It has no impact on fuel economy, but it adds “lubricity” to engines to offset the reduction in lubricating qualities inherent in the making of ultra-low-sulfur diesel fuel, Moore said.

Meijer's Mooney also stressed the importance of examining service levels to stores and considering cutbacks. He said that transportation costs need to be “part of the equation” in determining the number of store deliveries, along with shrink, freshness and out-of-stock issues.

For Meijer, “the pinch point around deliveries is out-of-stocks,” said Mooney. The chain's executives believe that “fewer deliveries translate to out-of-stocks and lost sales. That's the make-or-break deal on scaling back deliveries.”

To counter those kinds of arguments, transportation executives need to be armed with metrics demonstrating that retailers stand to gain from fewer store deliveries. One metric Mooney cited is that a 4.5% reduction in shipments yields greater savings than all of the fuel-saving technological advancements of the past 20 years.

“If you can save them a couple of million dollars, people start listening,” he said.

Another way of offsetting the cost of store deliveries is to maximize the percentage of backhauls — using what would otherwise be an empty trailer to pick up a nearby supplier's goods on the return trip to the warehouse. Hy-Vee has boosted the percentage of return trips engaged in backhauls to 60% in 2008 from 50.5% in 2005. About 8% of its backhauls are direct-store-delivery shipments to stores.

One of Hy-Vee's vendors asked the chain to backhaul goods not to Hy-Vee's warehouse, but to that of a third party. “We tried it reluctantly,” said Moore, starting with one load five nights per week and growing to three loads, twice a day, six days per week. “The relationship developed into 1,900 loads in '07, or about $1 million in additional income,” Moore said.

Last year, Hy-Vee began hauling several loads of paper per month for a local printer and is hauling agricultural products for local businesses. “We do this because we're trying to offset high fuel costs,” said Moore.

Mooney bemoaned the overall state of backhauling in the food retailing industry. “One-quarter of all [food retailing] trucks at any point in time are empty, and that hasn't changed in 20 years,' he said. “A huge amount of money is being left on the table in terms of empty transport miles.”

In trying to explain why more trucks aren't engaged in backhauls, Mooney said retail executives fear that, especially with rising diesel fuel costs, backhauls will boost their SG&A (selling, general and administrative) expense line. “It's amazing how many companies are focused on the expense, vs. looking at the possible savings,” he said.

However, many companies, including Meijer, are now looking at taking backhaul revenues and applying them against the expense line in order to show a net savings “and provide an incentive to go after backhauls,” said Mooney.

Another factor working against backhauls is the propensity of manufacturers to offer backhaul allowances that don't cover retailers' incremental expenses. In discussions with manufacturers about backhauls, inadequate allowances are “the 800-pound gorilla in the room,” said Mooney.

He attributed that in part to the ability of third-party carriers to offer manufacturers freight rates with which retailers can't compete. Vendors with many widely dispersed customers are also able to gain an advantage by bidding out freight rates and ending up with a low “average” rate.

Like Hy-Vee, Meijer is pursuing arrangements where it uses backhauls to carry goods to third-party warehouses. “Getting into the for-hire business and hauling other people's freight — that's where the industry is going to have to go,” he said.

Retailers are also investing in a variety of trucking equipment and technology to improve the efficiencies of their fleets. Mooney noted that over the past 20 years the fuel economy of trucks has increased thanks to improvements in technology, though only by 19% over that time, for an average of about 1% per year.

“That's better than nothing, but it's not going to save anybody in the face of $4 per gallon diesel fuel,” he said.

Still, retailers continue to focus on efficiency improvements.

Hannaford Bros., Scarborough, Maine, for example, joined the U.S. Environmental Protection Agency's SmartWay program in 2005 with a commitment to enhancing its fleet economy.

Since then, the chain has reduced its fuel consumption by 115,000 gallons of diesel annually, said Michael LaCourse, Hannaford's regional director of distribution, who was a conference panelist on transportation efficiency along with Moore.

Among the steps taken by Hannaford:

Hannaford's latest trailers feature “trailer skirts” along the side, which reduce drag and improve fuel economy by 4%-6%.

The trailers also use white roof sheeting, which reduces radiant heat absorption and lowers the trailer's internal temperature. ThermoGuard material in the walls of the trailers reduces degradation of the insulation, saving an estimated 1,000 gallons of fuel in the first five years.

Hannaford is paying attention to driver comfort, too, by providing better ergonomics in its tractor cabs.

The chain also studies the performance of its drivers and “re-educates drivers on better ways to operate the trucks,” said LaCourse. Drivers are rewarded with bonuses for reaching mile-per-gallon targets, yielding an estimated savings of 18,000 gallons annually.

In addition, loaders are educated about proper weight distribution throughout the trailer, which generates an estimated savings of 18,000 gallons annually.

This summer, said LaCourse, Hannaford will be installing Carrier's Vector hybrid diesel-electric refrigeration units in new trailers.

And on the warehouse side, Hannaford is “looking at ways to slot the warehouse to build pallets better and fill trucks [more completely],” he said.