The drive to cut costs from the wholesale-retail pipeline has entered a new phase that gives more power to independents.
As wholesalers strive to achieve savings in warehousing and distribution, they are allowing retailers to make more decisions on exactly which services they will use and pay for. Wholesalers also are providing clear financial incentives for retailers to become more efficient in their supply chain interactions.
The upshot is that a stronger wholesaler-retailer
partnership has emerged, according to wholesale executives interviewed in an SN survey. Wholesaler-retailer relationships will be an important topic of discussion this week at the National-American Wholesale Grocers' Association's Midyear Executive Conference, which runs through Wednesday in White Sulphur Springs, West Virginia. A number of wholesalers have created menus of services with extensive fee structures, replacing earlier models in which stores were charged flat rates regardless of which services were used. Store fees are now being gauged more closely through precise assessments, such as how far wholesaler trucks need to travel and how long deliveries take. Retail executives are getting more education in exactly what costs wholesalers entail.
"Over the last year to 18 months, retailers have become more aware of the savings available from partnering with their wholesaler in an effort to take out more of the costs that are there that they didn't always care about," said Al Flaten, president and chief executive officer of Nash Finch Co., Minneapolis. "[Independents] recognize that their survival depends on the distributor's survival and that we must all work together to compete with other [alternative] forms of retailing." At Fleming Cos., Oklahoma City, "costs are placed where they are incurred so both Fleming and the customer have the incentive to truly drive costs out and not to exchange them back and forth," said Robert E. Stauth, chairman, president and CEO. If a customer wants five deliveries a week, he can have them, Stauth said, "if he's willing to pay the cost of those deliveries. We want customers to feel like they own the warehouse, and whatever costs they move to it, they pay for. And conversely, if they pull costs out, then they save those costs as well." Wholesalers who are providing incentives for their retailer customers to change practices include the following:
Spartan Stores, Grand Rapids, Mich., which is encouraging retailers to speed up the wholesaler's delivery efficiencies by charging 67 cents a minute for the time its trucks spend at the retailer's back door. Pat Quinn, president and CEO, said the company expected to cut unloading time from 2.5 hours per store to 1.5 hours, but it has been able to reduce the time to 47 minutes per store -- at the same time it has reduced equipment and labor costs by $400,000 a year.
Roundy's, Pewaukee, Wis., which expects to make its fees more equitable by adopting activity-based costing, continuous replenishment at the wholesale and retail levels, and electronic data interchange. These practices "should in effect enable us to reduce freight and fees to our retail customers," said Gerald Lestina, president and CEO.
Richfood, Mechanicsville, Va., which is trying to use its manpower and delivery fleet more efficiently by encouraging retailers to take fewer but larger deliveries, "which makes better utilization of warehouse labor and the trucking fleet," said John Stokely, president and CEO. The program has resulted in an increase of fleet utilization from 50% to 90%, and those savings have been passed on to customers, he noted.
Nash Finch Co., which is attempting to improve customer services -- including working with retailers to encourage them to consolidate loads -- to maximize retailers' earnings, Flaten said.
Supervalu, Minneapolis, whose Advantage project is designed "to make sure that the more efficient retailers are, the better able they will be to obtain products at a lower net cost," said Jeff Noddle, executive vice president and president and chief operating officer of wholesale food companies.
"Retailers will be getting economic incentives to take goods more efficiently, and economics will drive efficiencies and encourage them to operate their businesses to save money." Following are the complete comments from interviews with wholesalers:
Grand Rapids, Mich.
We're looking at all our costs to find anything that is nonessential or that we can consolidate without affecting our business. There's nothing new about doing that, but it's something we regularly engage in and it fits right in with our re-engineering project. Part of that [cost-cutting] process has been to adopt a cost-plus program that redefines the way we price goods to retailers, giving members a menu of services that allows them to pay only for the services they use. We realize there are a lot of costs that can be reduced, but we also realize we must reduce them together, in cooperation with each other.
For example, we've redefined the way we charge for freight. In the past we had five pricing zones, and retailers paid a flat fee for deliveries based on which zone they were in. Now we impose a yard charge for the time it takes to load and prepare a truck for delivery and for the exact mileage to the store. Then, once the truck arrives at a retailer's back door, the retailer is charged 67 cents a minute for as long as the truck is there.
When we introduced this program a little over a year ago, we thought we'd be able to reduce the unload time per store from 2.5 hours to 1.5 hours. But the result has been to reduce the time to 47 minutes per store.
Our purpose was not to make any more money but to induce savings that would enable us to use our equipment more efficiently. And it has resulted in savings for us of $400,000 a year, including equipment and labor, and it has also reduced the retailers' costs, and as they lower their costs, they can lower prices to be more competitive, use the money to reinvest or determine any other ways to use the savings.
We're constantly reviewing all processes to see what we can do better. Looking at the whole process of costing goods is a work in progress, and there's more to come.
Nash Finch Co.
Nash Finch is attempting to provide retail customers with improved services to maximize their earnings, and we're attempting to lower our costs -- and to reflect lower costs to our customers -- through improved logistics and warehouse handling procedures, cross-docking, better control over inventory, improved information systems and electronic data interchange.
All those cost-cutting efforts are being spurred by pressure on everybody. Retailers get pressure from consumers and they put pressure on us as their supplier to provide better services and prices and take out costs.
So we sit down with retailers and say, here's what we can do to lower our prices by taking out costs that increase the price of goods and services to the retailer. For example, if we can work together to consolidate five truckloads a week down to two, then that represents a concerted effort by both sides.
Over the last year to 18 months, retailers have become more aware of the savings available from partnering with their wholesaler in an effort to take out more of the costs that are there that they probably knew about but didn't always care about.
Independents run their own businesses, but they're more open today than they ever were, and distributors are more open with them than ever before. No matter how independent-minded they are, retailers recognize that their survival depends on the distributor's survival and that we must all work together to compete with other forms of retailing.
That recognition comes because of all the things they've read and all the ECR meetings they've attended and the realization they can't do it by themselves. The independent is also seeing more new formats. He's already withstood warehouse stores and clubs and now he's faced with supercenters.
So he has to get better by taking out costs, by merchandising better and by providing something that other operators can't.
Robert E. Stauth
chairman, president, CEO
We've turned the whole company upside down in an effort to use our size to the customers' advantage. We're no longer using our clout in each marketplace but Fleming's clout nationally to get the best pricing for customers. And we're no longer using inside margins -- whatever money manufacturers give us goes 100% to customers.
The result is a lower cost of goods, which makes retailers better able to compete.
In our new system, the retailer who's willing to change his behavior gets the advantage when costs are driven out of the system because there are no subsidies in the new Fleming flexible marketing plan. Costs are placed where they are incurred, so both Fleming and the customer have the incentive to truly drive costs out and not to exchange them back and forth.
Today, if a customer says he wants five grocery deliveries a week and our distribution team says his volume dictates that he needs only three, he may tell us he's going to switch suppliers if he can't get five. But under the new system, we tell him he can have 10 deliveries if he wants -- if he's willing to pay the cost of those deliveries -- but he can save thousands of dollars a year if he takes only three.
We want customers to feel like they own the warehouse, and whatever costs they move to it, they pay for. And conversely, if they pull costs out, then they save those costs as well. So everyone has the advantage of owning a warehouse without having to invest in it.
The next giant step forward in cost-cutting will be to make greater use of technology to eliminate what human beings have to do now and give customers access to that information. We're getting better at technology all the time as we turn our time and efforts to developing systems.
Super Food Services
It's no great revelation to say that we're constantly reviewing relationships with our customers, delivery schedules, and marketing and merchandising plans as part of the ongoing daily challenge that comes with running a business. And if a program can help us be more efficient in the warehouse, then that translates into helping the retailer as well. But the basic nature of the business hasn't changed that much.
What's important is that we support one another and each other's business. But we have not quantified any programs into an Advantage project [like Supervalu] or a Vision 2000 [like Fleming]. We have no specific strategies that we're pursuing that translate to industry retail costs, but we are competitive.
We try to deliver goods to customers at the lowest prices, and that needs constant work. It's not like flipping a switch on and off.
We reinvent our business a little bit every day, and no one in the U.S. that operates a wholesale distribution business is as dedicated as we are to attacking costs with a vengeance. From logistics, productivity and warehousing down to the cost of copy machines, we pay attention to every detail that exists to determine if it's necessary or just nice. For example, last year we saved $105,000 by eliminating eight copy machines and going to a centralized copy system. If we uncover enough savings like that in the course of a year, we can still earn a fair return for our shareholders while becoming more competitive in the costs of goods to our customers.
We believe very firmly in sharing any cost savings with our customers, and we look for ways to put incentives into our selling systems. We design incentives to promote efficiencies at Richfood and to make money for retailers. Over the last couple of years, for example, we've put in systems to entice retail customers to take fewer but larger loads to make better use of our fleet and to develop a better picking pattern in the warehouse.
We know most retailers would like six deliveries a week, but that's a very expensive way to operate. So we designed the system to incent retailers to take fewer deliveries but larger loads, which makes better utilization of both warehouse labor and the trucking fleet. Then we compute the savings and give them back a portion of the savings. Using this system we've been able to increase our fleet utilization from 50% to 90%.
Such systems give retailers the incentive to make us more efficient and we return those efficiency savings back to them, which they can use to lower prices or enhance profits to be more competitive.
Another example: Several years ago we realized our trucks had a lot of downtime late in the day because all retailers prefer early deliveries. So we put in incentives for retailers to take late afternoon, evening and night deliveries at lower rates, and that made us more efficient and made them more efficient.
More recently, we've been encouraging full pallet shipping. This is not new, but for larger customers that can take full pallet loads, we've designed incentives so we get a savings and so do they.
We believe if we can save money anywhere, we can turn around and sell products cheaper to retailers. And if we can sell cheaper, then we can be more efficient than our wholesale competitors and allow our retail customers to be more competitive to drive retail sales.
One of our major projects involves application of activity-based costing on a commodity-by-commodity basis in an effort to lower costs. It started in July in our largest division in Milwaukee, beginning with an analysis of the perishables category, including frozens, produce and meat.
The process will take a couple of years, and we don't expect to see the benefits of our efforts until 1997, when we will finish the analysis in Milwaukee and the data can be applied companywide.
What we're doing is primarily an analysis of what it actually costs to stock and handle each commodity we carry, taking into account labor, productivity and all other factors. Once we have that information, we'll be able to do what we must -- whether that means reracking the warehouse or making further efforts to reduce costs throughout our facilities.
We won't be trying to make changes immediately. We have to apply the cost information more on a group basis than a single commodity basis in order to know that what we're doing is working. Since the beginning of the year we've also been testing continuous replenishment to reduce inventories and electronic data interchange to take costs out of accounting support systems. So far we're running with 7% less inventory than a year ago, and it will get better. We're looking ultimately to make a 20% reduction in inventory, and we think we can reach that goal in about a year.
We've also begun testing continuous replenishment at the retail level with two large customers, which will allow them to ultimately reduce their inventory needs, though I'm not sure if it will be as much as 20%.
All these programs should in effect enable us to reduce freight and fees to our retail customers.
executive VP and president and chief operating officer, wholesale food companies
Our primary concern is the Advantage project, which has many aspects, all designed to make our independent customers do a better job competing with chains and other operators. The Advantage project involves a variety of initiatives, including refined logistics and category management that will be very helpful in making retailers more competitive. It also brings forward new pricing and costing methods that will help the economics of the whole distribution system.
We're also trying to make our customers more competitive through our format work -- for example, expanding the number of food and drug formats; continuing to grow our Sav-a-Lot limited-assortment stores; changing the Cub Foods format by expanding perishables, general merchandise and health and beauty care varieties, and expanding County Markets, a smaller, price-driven version of Cub for independents in smaller- and medium-sized markets.
And we're working extensively with retailers on food-court development.
The whole basis of the Advantage project is to make sure that the more efficient retailers are, the better able they will be to obtain products at a lower net cost. It includes incentives for retailers to lower their cost of goods. Retailers will be getting economic incentives to take goods more efficiently, and economics will drive efficiencies and encourage them to operate their businesses to save money.