By Thomas R. Cutler
According to analyst firms like Retail Forward, Wal-Mart alone represents a 35% share of the grocery market in the United States. Working with retail food giants is already having a significant impact on how food processors and distributors run their businesses. Dan Rowe, Product Manager at JustFoodERP suggests, “With greater revenues increasingly coming from fewer customers, food companies need to embrace the same emphasis on supply chain efficiency, quality control and measuring vendor performance. If not, the consequences could be dire. Many food processors and distributors, however, lack the technology to do so. They rely on disparate systems made up of a hodge-podge of Excel spreadsheets, Access databases and accounting packages that lack the functionality needed to help their company achieve success in working with mass merchandisers such as Wal-Mart through tightened controls and improved visibility.”
Wal-Mart market share
Independent market share studies have determined that Wal-Mart’s food grocery market share will rise beyond 35% this year almost double from its 2004 level of 19%. Wal-Mart managed to double the sales volume of the country’s largest supermarket chain, Kroger. Based on a price strategy, Wal-Mart’s pricing is on average 20% lower than the supermarket chain’s. As enthusiastic as food companies are to capture Wal-Mart as a customer there are obvious challenges. JustFoodERP, powered by Microsoft Dynamics NAV, has helped numerous food processors and distributors adjust and react to this business change. Rowe concluded that, “An integrated solution that manages every aspect of a food business from product development, costing and quoting, sales order processing, inventory controls, production, fulfillment, and finance, will ensure that every asset in the business is utilized to the fullest and to the satisfaction of Wal-Mart.”
Mass merchandisers like Wal-Mart, Target, and Costco have had the most significant impact on the retail business in a generation. Their relentless focus on supply chain efficiency, quality control and measuring vendor performance has put many of their competitors and former suppliers out of business. These retailers are now front and center in the food business.
The Shift to Large Customers Like Wal-Mart
In the past few years there has been a huge shift in the past decade toward the large retailers. Ten years ago fifty percent of the food business was from Top 10 customers like Wal-mart, Costco, and Target; now that percentage exceeds eighty percent.
The Shift to Large Food Retails Impacts the Nature of the Business
It is obvious that this tendency towards customer concentration can offer advantages to a food manufacturer or distributor. Increased revenue growth, larger sales orders, stable sales forecasting and production planning, can mean that in some ways, a business is simplified.
However, working with large customers can also represent risk to a business. Rowe insists, “The analogy of putting all your eggs in one basket means that a slide in your vendor performance score could mean that you could be replaced by your competitor. Mass merchandisers such as Wal-Mart, Costco, or Target are placing more demands on business process change as they drive more efficiency through the supply chain. While there may be a number of advantages in working with a larger customer, it has also resulted in a change in how food businesses must run their companies.
Business Processes
Working with Wal-Mart or other mass merchandisers requires significant changes to internal business processes. The sales order management process that a food company developed to satisfy smaller regional customers will not compare to the requirements of a mass merchandiser. Expectations of shorter lead times require more accurate demand planning and sales forecasting. These shortened lead times also create a need to plan raw material requirements more accurately. The inevitability of private label product focus could also devalue your own brand recognition. Simultaneously, a private label product requirement creates a need for more stringent product development processes.
Demand Planning & Sales Forecasting
Working with Wal-Mart means working with a customer that has the highest of performance expectations. On-time, on-quantity fulfillment metrics will make or break future orders, or business growth. While production and logistics planning has an impact on these metrics, the root of success for on-time, on-quantity begins with accurate demand planning and sales forecasting.
JusftFoodERP’s Michael King urges that, “Without accurate sales forecasting, the production floor could run into capacity constraints, or ingredient shortages. A disciplined approach to business planning, demand planning, and sales forecasting will be the start of improved business performance.”
Product Development and the Private Label Product
Product development is a key requirement when working with mass merchandisers like Wal-Mart. These customers demand a private label product. This means multiple iterations of recipe versions for both bill-of-materials and machine routings. Many companies in high growth modes or companies new to product development may not have the discipline to accurately…
* capture recipe versions
* solicit measurable customer feedback
* track which versions made it to the customer for evaluation.
Product development also requires more accuracy with sales quoting. Full knowledge of exact costs for raw materials, labor, overhead, and freight costing is critical to a profitable customer. A switch to private label product also means a switch to make-to-order manufacturing. A transition from make-to-stock to make-to-order will impact the production planning, manufacturing, and packaging.
Sales Order Processing & Integrated Electronic Data Interchange (EDI)
EDI is the prevailing method of transaction processing for mass merchandisers like Wal-Mart. Those food companies already doing business with Wal-Mart have already made this technology investment. However, without the integration of EDI transactions into a business system, companies are not getting the most out of this automation. King suggests that, “Receiving EDI orders or order changes would ideally flow through an automated process. Any orders that are off order rules should automatically be flagged. Common order rule infringements may include less than full-pallet orders. These infringements may contradict agreed terms and may impact pricing. Manually processing these orders may create an unwarranted delay in order production or order fulfillment.”
A number of Wal-Mart suppliers also use advanced shipping notices (ASN) for product, or even ASNs specific to CHEP Pallets. Taking an integrated approach to EDI order processing reduces human error, accelerate production, and fulfillment. The result is improved performance.
P.C.R.Q. (Pricing, Costing, Rebates, Quoting)
Price setting is not an option; prices points are communicated to manufacturers who then have to derive a maximum unit cost to Wal-Mart based on pre-defined gross margin percentages. As a portion of the unit costs are fixed, the preference for every food manufacturer is high volume orders. The mechanism to ensure high volume long term orders is to offer volume based pricing and rebate schemes.
Supporting these advanced pricing programs and rebate offerings can become complex. They are based on perfect costing information; most food manufacturers can only account for average costs on bill-of-material items and do not have good visibility on labor, overhead, or freight costs attributed to a product. Rebate programs are difficult with disjointed Excel spreadsheets and Access databases. Most food companies often accept these practices as the price of doing business.
Production Planning
Often with reduced delivery lead time expectations, food manufacturers and distributors depend on sophisticated planning to ensure that raw material levels are sufficient to produce product. If Wal-Mart’s lead time on delivery is ten business days, and key raw materials or packaging lead times exceed ten days, the purchasing department needs to adequately plan for purchases. Concepts of min/max levels, safety stocks, and Economic Order Quantities (EOQ) often result in over compensated inventory levels, or worse, depleted inventory levels that prevent production. With private label products, the food production environment is forced into a make-to-order scenario. This could require new approaches to scheduling. Resource utilization becomes critical to order profitability. Visibility on available capacity or capacity constraints will allow reduced change overs, or reprioritize production orders.
Order Fulfillment and Logistics Planning
With increasing costs associated to freight, JustFoodERP has found that food companies’ warehouse and shipping processes demand extra attention. King said, “Planning for full trucks is simple, however most food processors depend on combining multiple orders into a single shipment. Accurately accounting for freight costs based on pallet count, weight, or cubage can be time consuming or grossly inaccurate, skewing costs.” The paper work required to generate multiple order shipments can result in late docking and penalties.