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Collaboration among supply chain partners is not new. But developments in information technology and, in particular, the Internet, have created an explosion in the economic value that collaborative initiatives can deliver.

What's New in Collaboration?

Much of the value creation and hence excitement around collaboration has focused on common language standards and new information technologies that foster interaction. Collaborative Planning, Forecasting and Replenishing (CPFR), for instance, promises new efficiencies, inventory reductions, and service enhancements while point-of-sale (POS) and scan-based trading (SBT) drive the lockstep integration of the supply chain players. Although these initiatives certainly require new levels of leadership, trust, and communication, the focus remains on the optimization of information and product flow between existing nodes in a traditional supply chain, with the somewhat vertically integrated corporation at the center (see Figure 1.0). However, the more significant impact of collaboration and its supporting technologies will be to drive fundamental change in the shape of the supply chain, the number of players within it, and their individual roles as they deliver goods, services, and information to the consumer.

Figure 1.0
The traditional food supply chain

Considering the traditional food supply chain, it is evident that some forms of collaboration have been chipping away at the vertically integrated company for some years - namely contract manufacturing (co-packing as well) and third-party logistics. More recently, logistics and information technologies have fostered the ability to successfully obviate distributors in favor of delivering directly to retail venues (direct store delivery) and to optimize inventory management and service between any set of partners. Today, new players in both the business-to-business and business-to-consumer e-commerce arenas are offering other collaborative services to multiple links in the supply chain, including suppliers, retailers, and consumers. These aggregators, market makers, and agents offer efficient consolidation nodes for information and products, effectively showing a single face and transaction point to both the provider and user of the goods.

So what? Aren't we still just talking about the more efficient flow of information in a standard supply chain? No. In fact, we are looking at the types of relationships and efficient sharing and aggregation of knowledge that will finally allow for the realization of the promise of core competencies. It is core competency meets supply chain integration meets e-commerce. New knowledge of what makes collaborative relationships successful, in concert with information technologies, applications, and providers that make familiar knowledge management concepts a reality, are allowing organizations to more effectively partner with other companies up and down the full supply chain. The old vertically integrated company is physically disintegrating, and in its place will likely be some form of collaborative network (see Figure 2.0), in which each player can truly focus on their core competency, or competencies, and excel at them. Such a network, in which we see intra-company optimization as well as inter-company optimization, ultimately is much more efficient than the intermediate supply chain solution that focuses on optimization of the links between the partners in the chain.

Figure 2.0
A collaborative supply network

What does this mean for your company? It means you can start to take the concept of core competency more seriously. You need to map your supply chain and markets against your capabilities and seek out partners that fill your capability gaps, or with whom you can share capabilities or to whom you can transfer capabilities. What should your company turn into - a brand management shell, a specialty manufacturer, a researcher and developer of food technologies? It is not likely that a long-standing manufacturer will transform into a Web-based materials portal, or vice-versa, yet your company will look substantially different. In fact, your company will be a broad-based, electronically-linked network of entities with distributed capabilities, held fast by the common goal of winning consumers with high-quality products delivered flawlessly at the right price point.

Let's move from the theoretical to the real world, and illustrate some key food industry collaborative trends with case studies. Some are well-known food industry giants that are making notable strides in establishing strong partnerships and expanding their collaborative networks, while others are new players in new roles that are facilitating the type of radical changes discussed above. Their successes are encouraging, and may offer insights for you and your company, whether you find yourself within the food industry or otherwise.

Case Studies in Collaboration: Who's Making it Work?

Collaborative Planning, Forecasting, and Replenishment - Nabisco with Wegman's

A truly robust form of collaboration is occurring in the realm of Collaborative Planning, Forecasting, and Replenishing (CPFR). With this type of collaboration, a retailer and a manufacturer share forecasts via two-way interactive communication links to reduce pipeline inventory while concurrently improving service levels. Wal-Mart, Warner-Lambert, Benchmark Partners, SAP, and Manugistics started using this approach in 1995, however, it was not until recently that manufacturers and retailers enthusiastically espoused this strategy.

Nabisco, the largest cookie and cracker maker in the United States, has emerged as a leader in CPFR. In a pilot program, Nabisco and Wegman's, a Northeastern supermarket chain, shared forecast data for 22 items, mostly from the Planter's line of products, which includes Planters nuts and Corn Nuts snacks. Nabisco chose the Planters line of products due to the high degree of promotion and breadth of the categories it provides. Traditionally, these two factors create a high degree of variability and disparity in the forecasts of trading partners. The sales force at Nabisco generated a forecast and compared it with Wegman's forecast. Though this process was initially done manually, the process was automated with Manugistics software that compared the two forecasts and alerted both parties of any variance.

The program was an overall success, as category sales increased 15.5% at a time when these same categories were down 8% at other retailers. Service levels increased to 97% from 93%, and days-of-inventory was reduced by 18% or 2.5 days. Additionally, Planter's market share increased to 53.6% under this pilot.

These results demonstrate the power of CPFR. As information technology resources become available, we will see the scalability of CPFR into larger categories and across other product lines. CPFR is not a panacea, however, as transportation and distribution are still going to be critical to ensuring timely replenishment. So in concert with CPFR, Nabisco has been taking steps to ensure that this downstream end of the supply chain is synchronized through collaboration as well.

Collaborative Manufacturing Pillsbury and Seneca Foods

Contract manufacturing was one of the first forms of collaboration across the supply chain.

Companies seeking to increase return on assets looked closely at their operations. They identified functions outside their core competency and sought alliance partners that possessed the capability to close the performance gap. Pillsbury, one of the world's leading food companies, went through this exercise in the early 1990s. They realized that their core competency was in growing vegetables using proprietary seed technology, not in production and canning. A logical strategy for them involved outsourcing production for their Green Giant line of canned vegetables and selling off their manufacturing plants. To execute this strategy, in 1995 Pillsbury entered an arrangement with Seneca Foods, a major processor of produce that primarily cans and freezes vegetables, and transferred ownership of six canning facilities in the United States.

The success of this collaborative arrangement is demonstrated by Pillsbury's reduction of corporate assets by more than $700 million. Pillsbury reduced its cost of goods sold as a percentage of sales from 75% in 1993 to 66% in 1997. During the same period, operating margins increased from 8.3% to 13.3%. Pillsbury is expanding the benefits of this relationship beyond production into areas of product development. They are now able to get their new products to market 50% faster, capturing an entirely new stream of revenues that they were previously unable to realize.

Seneca Foods achieves some remarkable benefits from this relationship also. Over half of Seneca's production volume is from its relationship with Pillsbury. This increased volume allows Seneca to allocate overhead over larger volumes and ultimately realize greater margins. Pillsbury is also sharing procurement strategies and volume discounts with Seneca.

Pillsbury currently outsources approximately 30% of its production and only owns two Green Giant production facilities. They expect to see contract manufacturing account for 40 to 50% of the company's production, based on the success it has achieved with arrangements with Seneca and other parties such as J.R. Simplot, one of the largest processors of frozen potatoes, frozen fruits, and other vegetables.

Collaborative Logistics Management

Nabisco

The proliferation of third-party logistics providers is facilitating another source of collaboration across the supply chain. The 1999 Food Industry Transportation and Fleet Management Report found that while more companies are outsourcing some or all of their transportation needs to third-party logistics providers, most still operate private fleets. However, Nabisco has been very aggressive in its use of third-party logistics providers; they have outsourced all of their transportation and distribution warehousing. Like Pillsbury, Nabisco took inventory of its core competencies and determined that it is not a transportation or warehousing company. Its logistics expenditures grew to six percent of total sales and it had $260 million of raw and finished material on hand, which equated to 96 days of inventory. When looking at transportation, Nabisco realized that driver costs were upwards of 54% of total transportation costs - its largest expense category. To recapture this lost value, Nabisco set a goal of six percent reduction in its total logistics spend and turned to outsourcing to achieve this reduction.

Nabisco is using technology to manage its third-party logistics providers. Through the use of distribution requirements planning tools that interface with the plant-level scheduling tools, Nabisco gains access to real-time data. Now Nabisco is able to track its third-party providers using trip recorders, routing software and many types of tracking software to capture precise information regarding inventory in transit. This tracking has led to significant gains in efficiency and utilization, while reducing required safety stocks, which translates into significant savings.

Nabisco has turned collaborative relationships into a competitive advantage. They have instituted a drop-trailer program, managed purchases in full-truckload increments, and designed mixed pallet loads that are deliverable directly to the buyers' stores - creating value for all parties involved. The third-party logistics industry will continue to grow as food industry players realize the importance of distribution to the replenishment process. However, this realization has spurred even more aggressive models that bypass the distribution center altogether.

Collaboration Between Manufacturer and Retailer (Direct Store Delivery)

Frito-Lay with Wegman's

The emergence of the direct store delivery model is intricately tied to the emergence of point-of-sale data capture. Within the supermarket channel with aggregate sales of $100 billion, nine of the top 20 categories are direct store delivery and contribute almost $50 billion of sales and provide 72% of the industry's sales growth.

The business case for direct store delivery is compelling. Under this model, the retailer gets out of the inventory management business and becomes a lessor of shelf space. If the retailer were responsible for the staging, receiving, stocking, shelf management, and order placement for the direct store delivery lines, approximately 100 hours of labor per week would be added to their responsibilities. Since the grocery industry operates on slim margins, the effects would be significant.

While both direct store delivery and warehouse suppliers claim to have the same 23% to 25% margins, the former model removes the added cost of warehousing, delivery, and merchandising. The retailer sees a final contribution margin that averages 8.6% versus a contribution margin of 5.7% for non-direct store delivery items. This difference goes right to the retailer's bottom line. Wegman's entered into an arrangement with soft drink manufacturer Pepsi and Frito-Lay, a large snack food manufacturer, which is a testament to the power of collaboration between retailer and supplier under the direct store delivery model. Pepsi approached Wegman's with a proposal for the Frito-Lay line and Pepsi products. The beverage category was a low-margin category that received high incidence; the salty snack category was a high margin category with only half the incidence of beverages. Pepsi proposed its House Party promotion which would drive up the sales of the high-margin salty snack category.

Under this arrangement, Wegman's allocated Frito-Lay prime retail floor space. Pepsi and Frito-Lay provided in-store displays, increased inventory, and increased visits by merchandisers, sometimes as many as two to three per day. The results far exceeded anyone's expectations. Transaction data showed people were buying more of each product, and buying more frequently. Wegman's saw an eight percent increase in its salty snack category and had more than $1 million in incremental sales contributing $200,000 in incremental profit. Pepsi saw a 26% increase in the sale of beverages and a 28% increase in the sale of Frito-Lay products. These results have encouraged Wegman's management to collaborate more closely with its direct store delivery suppliers, and to expand its use of the model.

Collaboration with the Consumer

Aggregators and Agents Bypass Retail - Peapod and Streamline.com

In the realm of shipping direct to the consumer, technology is enabling new players to enter the market and compete with traditional grocery stores, taking somewhere between eight to 12% market share of grocery sales. The players in this segment have to rely on collaboration with their supply chain partners to ensure that the consumer is satisfied, because while consumers may be willing to accept stock-outs in traditional stores, they will not tolerate stock-outs by the consumer direct players.

These players rely on collaboration with suppliers to ensure that daily inventory levels are adequate and deliveries are based on continuous replenishment. Peapod, an online grocery retailer founded in 1989, provides consumer direct services primarily through the use of retailers. Its strategy is not to compete with the retailers but rather become a symbiotic extension of their business. Customers place their order through a personal computer, and a personal shopper retrieves the groceries and delivers them to the customer. Peapod's revenue is derived from delivery fees and the margin they generate from a retailer discount. The retail partner benefits because Peapod adds incremental volume to their sales and shares the data captured from consumers. This method of delivery has limited scalability; as Peapod grows, it is moving to a warehouse fulfillment model. It should achieve a threefold increase in picking times and reduce the number of stock-out/substitution instances.

Streamline, a delivery, buying, and errand service, uses the warehouse fulfillment model, striking partnerships and supply relationships with large food manufacturers and distributors. Via suburban warehouses, Streamline acts as an agent to the consumer by delivering a conglomeration of basic grocery items, prepared meals, dry cleaning, film processing, video rental, and postal service/package pick-up. As with Peapod, orders are personal computer-based, though delivery is on a pre-scheduled, weekly basis. Streamline's efficiency, however, comes from its warehousing, picking, and transportation model, which is much more efficient than picking from a grocery store aisle. Its margins are enhanced by its physical location as well. Traditional retailers are spending 15% to 18% of sales on real estate located in residential areas. Warehouse fulfillment centers avoid this cost because they are located in less expensive industrial centers.

Ultimately, one can imagine an agent that gains an intimate understanding of a family's need and consumption patterns and looks to fulfill their demand at the right time at the lowest price from their marketplace of suppliers. Look to Webvan, a California-based Web grocer, as it expands a similar model on a national basis.

Collaboration Between Retailers and Manufacturers with Supplier Aggregation

Marketorder.com

The food industry is not immune to the business-to-business e-commerce excitement, even though only 35% of firms report using electronic data interchange (EDI), most of which is entirely for purchase order exchange. The emergence of procurement portals and application service providers (ASPs) specifically for buyers and sellers in the food industry demonstrates the powerful impact of technology - specifically the open standard of Internet-based e-commerce. This form of collaboration creates a breakthrough that EDI could never accomplish with its point-to-point solution and expensive infrastructure requirements. The portals and ASPs use collaborative technology to add value for both buyers and suppliers. Since direct store delivery has become the replenishment method for almost half of the items in the typical grocery store, ordering from multiple suppliers with disparate ordering systems has become a complex task. This is greatly simplified by the use of a portal or ASP that allows buyers to aggregate their orders to multiple suppliers through one common interface. The result is a significant reduction in the cost of placing orders and the elimination of costly order entry errors. The supplier shares in the benefit through reductions in their order processing costs and simplification of supply forecasting and trend analysis.

Marketorder.com, an application service provider, was formerly Marketware, a company that provided proprietary order replenishment networks for over 15 years to large industry players such as Ahold, the Netherlands-based food retailer with numerous locations in the eastern United States, and Supervalu, the largest food wholesaler in the United States. The company migrated its technology to the Web and changed its name to reflect its new robust capabilities. Through its relationships with large players such as Ahold and Supervalu, Marketorder.com is offering an application that brings together all the suppliers of a buyer under one replenishment ordering process. The retailers benefit from the application's ability to handle high volumes, reduce operating costs, and generate additional sales. Marketorder.com found that its customer base typically was spending between $15 and $20 to process an order. Marketorder.com reduces the administrative cost of procurement to roughly $2 to $3 per order. The company makes available its legacy systems to any retailer, large or small, without the retailer incurring the tremendous capital outlay of installing and maintaining the legacy system, or a comparable EDI network.

The technology that makes this possible is a Microsoft Windows CE-driven handheld device, which the retailer leases from Marketorder.com. The retailer and the suppliers reach a sourcing agreement; then, based on this agreement, Marketorder.com uploads the supplier catalogues onto the handheld device. Suppliers can request a number of promotion items for categories that are heavily promoted. Marketorder.com leases the equipment to the retailer, allowing a continual refresh as new technology and features are added to the handhelds. This precludes the retailer from investing in technology that can quickly become obsolete - another value added by Marketorder.com. The supplier benefits from the reduction in cost for capturing and processing the order, and there are almost no data entry errors. The initiative is so compelling that Supervalu is rolling out a program to establish Internet-based communication with the 1,000 or more suppliers with whom it does business in an effort to reduce the administrative cost of ordering.

Conclusions

These examples from the food industry illustrate the variety of forms that supply chain collaboration can take. The arrival of e-commerce and its empowerment of new players such as agents and aggregators have only served to add further opportunities. Each yields its own unique economic benefits; increased service levels, reduction in logistics costs, increased sales, or reduction in real estate costs are just a few examples. But the real news is the hastened demise of the vertically integrated company and the rise of a network of players each with its own strong core competencies. Any company that fails to assess strategically its own unique capabilities and stake a position in the evolving collaborative network may lose more than an opportunity to improve operations. It may lose its position in the supply chain altogether - an end game to which no one would aspire.

References

Cooke, James Aaron, CPFR: "The Countdown Begins", Logistics Management Distribution Report, November 30, 1999 No. 11, Vol. 38; Pg. 59
Andel, Tom, Harness the Power to Own Your Customer; Supply Chain Flow, "Material Handling Engineering, June 1, 1999, No. 6, Vol. 54; Pg. SCF13
Kuhn, Mary Ellen, "Teams that work; Pillsbury's Alliance Strategy", Food Processing, February 1, 1999, No. 2, Vol. 60; Pg. 19
Kuhn
Andel
Cooke, James Aaron, "Delivering Value", Logistics Management Distribution Report, November 30, 1999, No. 11, Vol. 38; Pg. 51
Wellman, David, The Direct Approach To The Bottom Line, Supermarket Business, August 1, 1999, No. 8, Vol. 54; Pg. 15
Wellman, David, "The Direct Approach To The Bottom Line"
Wellman, David, Direct Store Party, Supermarket Business, Sept 1, 1999, No. 8, Vol. 54; Pg. 15
Wellman, David, "Direct Store Party"
"Sense of Sell; Selling Produce through the Consumer-Direct Market, Progressive Grocer", August, 1998 No. 8, Vol. 77
Mathews, Ryan, "You Say You Want a Revolution? Grocery Industry Being Transformed Toward Consumer-Direct Marketing Models", Progressive Grocer, March, 1998, No. 3, Vol. 77; Pg. 22
Wellman, David, "The Direct Approach To The Bottom Line"
Interview with Larry Andrews form Marketorder.com
Hardgrove, Amy, "Speeding Toward Seamless Data Exchange", Grocery Headquarters, April 1, 1999, No. 4, Vol. 65; Pg. 84

Copyright© 2000 Accenture

About the Author

Title: 

Senior Manager, Supply Chain Practice

Accenture

Bruce Walton is a Senior Manager in the Accenture Supply Chain Practice. He has worked with clients across a broad range of industries including telecommunications, food and consumer packaged goods, medical products, and electronics. His primary focus areas are manufacturing operations, demand and supply planning, inventory management, procurement/e-procurement and B2B e-commerce solutions.