While retailers and their suppliers still engage in tense negotiations over core product transactions — witness the recent critiques issued by Safeway's Steve Burd regarding CPG pricing — trading partners are increasingly taking a more conciliatory approach.
Many new collaborative programs center on manufacturers leveraging retailers' POS data to mutual advantage. But on some occasions a retailer and a manufacturer recognize the benefits that can flow from collaborating on transportation logistics. Two Midwest trading partners — Hy-Vee, West Des Moines, Iowa, and Hormel Foods, Austin, Minn. — showed how this can be done at the Grocery Manufacturers Association's Information Systems/Logistics Distribution (IS/LD) Conference, which was co-located with the Food Marketing Institute's Supply Chain Conference earlier this month in Miami.
Jim Moore, assistant vice president of transportation, Hy-Vee, described the chain's logistical arrangement with Hormel, which began slowly in 2004 and has expanded dramatically in the past few years, as an example of “true collaboration between a supplier and retailer.” The collaboration, he added, has enabled Hy-Vee to “reduce expenses, generate additional income, and [favorably] impact the environment.”
What Hormel and Hy-Vee have succeeded in doing is relatively straightforward on the surface. In the seven-state area where Hy-Vee's 225 stores and seven of Hormel's food processing plants are located in proximity to each other, Hy-Vee trucks drop off their store deliveries and then pick up refrigerated foods at Hormel's plants.
In the conventional “backhaul” scenario, Hy-Vee's trucks would simply bring Hormel's products back to Hy-Vee's own distribution centers in Cherokee, Iowa, and Chariton, Iowa. In one instance — pick-ups at Hormel's Eldridge, Iowa, plant — Hy-Vee does in fact backhaul four loads per week.
But for 42 other weekly loads, Hy-Vee does something fairly unusual in the food industry, bringing those goods to Hormel's frozen food distribution center for the Western U.S. in Osceola, Iowa, which is conveniently located just 25 miles west of Hy-Vee's Chariton DC. Twenty-three of those pick-ups are made at Hormel's plant in Fremont, Neb., near Omaha.
“This isn't [primarily] a backhaul, customer pick-up relationship,” noted Thomas Gravelle, director of logistics, transportation and customer service for Hormel. “This is contract freight.” Hy-Vee is replacing the role otherwise served by third-party contract carriers, which are not widely available in southern Iowa.
At the same time, Hy-Vee's deliveries for Hormel fill trucks that might otherwise have gone empty on their return trip; last year, the chain reduced such “empty miles” by 420,000, a savings of 70,000 gallons of diesel fuel, not to mention the elimination of 710 metric tons of carbon dioxide from the atmosphere. Moore noted that the Hormel deliveries and a few other much smaller deliveries for local businesses, combined with all of Hy-Vee's backhaul deliveries to its own DC, account for about 65% of the trips taken by Hy-Vee's trucks after they drop off goods at stores.
Last year at the jointly held FMI/GMA supply chain conferences, Robert Mooney, group vice president, wholesale and manufacturing, Meijer, Grand Rapids, Mich., observed that arrangements like the one between Hy-Vee and Hormel, whereby retailers get into the for-hire business and haul freight to another company's warehouse, are unusual but represent “where the industry is going to have to go.”
Indeed, an example of retailers moving in this direction is the Empty Miles Service launched this year by the Voluntary Interindustry Commerce Solutions (VICS) association, which attempts to match a company's returning empty trailers with potential loads that can be delivered along the return route.
For Hy-Vee, its contract freight deal with Hormel has proved financially rewarding as it has grown over the years. In 2004, Hy-Vee delivered 597 shipments for Hormel, primarily from two plants. In 2006, the number of shipments jumped to 1,217; in 2007, when the number rose to 1,942, Hy-Vee earned about $1 million in revenue for making these deliveries, Moore said last year at the FMI/GMA conferences.
In 2008, Hy-Vee's Hormel shipments increased to 2,200, “and we're getting ready to increase it again,” Moore said at this month's jointly held conferences. “But we don't want to take more than we can handle. That would not be fair to them or us.”
Many of the perishable items Hy-Vee picks up at Hormel plants need to get to Hormel's Osceola DC the same day. “Hormel has a lot of trust in us to get our trucks into their DC at the scheduled time,” said Moore.
That reliability is one of the incentives for Hormel to contract out deliveries to Hy-Vee, said Gravelle, who acknowledged that cost-wise it's about the same as using standard carriers. “It's just the right thing to do,” he told SN. “It's an environmental thing, a customer-supplier thing. Why give the money to a third-party when I can just give the money to Hy-Vee? And when you take the miles out, it's inevitably going to be the least cost for everybody.”
INITIAL CHALLENGES
Hy-Vee's shipping arrangement with Hormel was not without some significant challenges at the outset. For one thing, disruptions inherent in Hormel's meat-packing facilities — such as dealing with live animals in the intense heat of summer and the extreme cold of winter — tend to cause uncertainty in the supply chain.
And because of depressed margins “there's not a lot of money to invest in loading docks,” said Gravelle. This resulted in several-hour delays as Hy-Vee's drivers had to wait their turn for goods to be loaded onto trucks and unloaded at Hormel's DC. “We had some turmoil with drivers,” added Moore.
Moreover, in 2004 Hormel's shipping procurement responsibilities were decentralized, with transportation managers at each plant who were worried about disrupting existing third-party carriers. The multiple contact points for Hy-Vee caused some “communication issues,” said Moore. “Our expectations weren't being met very well.”
There was also the inevitable challenge in managing change at these plants. “No one wants to change because it's more work,” said Gravelle. “They were not as engaged [with Hy-Vee] as they needed to be when we got started.”
But, noted Gravelle, “we did get these issues resolved,” adding, as he addressed the conference audience, “we wouldn't be up here today if we didn't.”
For example, to address the delays, Hormel allowed Hy-Vee's drivers to deploy “drop trailers” at the larger Hormel plants: Picking up an already-filled trailer while leaving an empty behind, and dropping off the full trailer at Hormel's DC and picking up an empty. The drop trailers represented “a capital investment” by Hy-Vee, said Gravelle.
In addition, Hy-Vee trailers were given loading and unloading priority at Hormel facilities. For example, at the Osceola DC, it was stipulated that there must be four empty trailers for Hy-Vee's drivers by 6 a.m. and seven empty trailers by 7 a.m. The DC's employees “are measured on that and they execute it pretty well on a daily basis,” said Gravelle.
Hy-Vee has been able to avoid “over, short and damaged” loads by having Hormel take responsibility for making sure the count is correct (shipper's load and count) in the bill of lading, said Moore.
In 2006, Hormel resolved the decentralization issue by centralizing its transportation function at its corporate office. The corporate transportation manager has been more effective in explaining Hormel's Hy-Vee program to the commercial carrier base than were the series of plant managers. “Instead of having a lot of chirping going on, we've got a clear direction,” said Gravelle.
Centralization also gives Hy-Vee a single point of contact. A consequence of this improved communication is that when Hy-Vee and Hor-mel do engage commercial carriers, they now use the same companies when possible.
“We've developed a close relationship between the Hormel and Hy-Vee transportation teams,” said Gravelle. “People are on the phone to each other on a daily basis.”
