The Weakest Links

Throughout history, circus and carnival strongmen have broken chains in their shows as an ultimate demonstration of power. Indeed, chains are strong devices that aren’t broken easily, and certainly not without a lot of effort.

Yet there’s also a famous proverb: “A chain is only as strong as its weakest link.”

In the food retailing industry, retailers and manufacturers alike have been challenged recently with their own weak links — areas that threaten to bring dissatisfaction, or, at the worst, harm, to consumers, and also directly block their paths to profitability and growth. Factors such as food safety, competition, the growth of online retailing, and headaches in transportation and logistics are perplexing supply chain executives more than ever before.

Luckily, the industry’s leading trade groups are keeping these issues top of mind to help the industry manage conflict as best it can. Yet CEOs and other leading executives have a major role to play in pinpointing their weakest links and managing risk before their supply chains experience major disruptions. In fact, sometimes the most vulnerable areas reveal themselves in the forms of poor communication and execution, or inexperienced management.

Progressive Grocer spoke with several executives in the trenches of the grocery supply chain, while also examining the new “State of the Retail Supply Chain” report published by the Arlington, Va.-based Retail Industry Leaders Association (RILA), to get a better sense of the weakest links. Here are the five that came up time and time again.

1 Transportation: A Perfect Storm?

In the past year, transportation issues have taken center stage among the supply chain challenges faced by retail executives, according to “State of the Retail Supply Chain,” published by RILA in conjunction with Auburn University, in Alabama, and sponsored by Thorofare, N.J.-based Checkpoint Systems.

The report, which surveyed executives from a wide array of retail channels, including grocers such as Food Lion, H-E-B, Meijer and Wal-Mart Stores Inc., pointed specifically to protracted congestion at West Coast ports, which was obviously an unavoidable problem. Other major concerns included trucking capacity and driver shortages, hour-of-service regulations, intermodal chassis headaches, and rail delays. Essentially, it’s a “transportation perfect storm,” as one retail executive commented in the survey.

Dan Elrod, VP of sales, mass market for Temple, Texas-based supply chain services provider McLane Co. Inc., is particularly concerned about the shortage of licensed commercial drivers. From his perch, working with 21 grocery distribution centers (DC) for the McLane Grocery Supply Chain Solutions division, the problem is already bad, and it’s going to get a lot worse.

“The nation is over 50,000 drivers short right now, and is expected to be literally a couple of hundred thousand drivers short within the next 35 years,” he says. “If you’re a manufacturer that relies on LTL [less than truckload] carriers to get your goods from your plant to a DC, whether it’s a McLane DC or directly to a retailer, then you have to depend on a less reliable transportation network today.”

Adding to that challenge is the fact that many grocers are establishing stricter delivery regimens with tighter delivery windows and penalties, in an effort to maintain more efficient operations, according to Frank McGuigan, president of transportation management at Transplace, a third-party logistics provider based in Frisco, Texas.

“Trucks arriving outside the scheduled delivery window are forced to wait behind any other trucks on-site, which can be hours or days,” he says. “Monetary penalties for late arrivals are charged to the shipper, who then passes them along to the carriers in the form of a deduction from line-haul and freight charges. To help speed up the unloading process, many retailers have begun utilizing nonemployee loading services that are dedicated to unload all inbound trucks and are paid for by the carriers.”

Meanwhile, the new Federal Motor Carrier Safety Administration regulations for hours of service (HOS), along with compliance, safety, accountability (CSA) standards, are expected to decrease driver utilization by 3 percent to 5 percent, adds McGuigan.

“As a result of increased regulation and industry capacity challenges, grocery retailers and CPG companies are experiencing some of the highest freight costs they’ve seen in recent history,” he notes.

McGuigan’s advice to grocers? “It’s critical to strategically plan for this challenge to ensure access to truck capacity and avoid disruptions in the transportation of goods. This includes optimizing transportation management by consolidating shipments when possible, expanding your carrier base, or establishing carrier-friendly practices that improve efficiency and driver productivity.” Intermodal transportation, he adds, is another area with “enormous growth opportunities.”

2 Product Shortages and Out-of-stocks

Directly related to the transportation challenges are product shortages — after all, if a product doesn’t arrive on time, it isn’t on the shelf in time for purchase. However, there’s more to the out-of-stock issue than late deliveries, according to McLane’s Elrod.

“As retail becomes more and more competitive, you’re seeing retailers become more reactive in their pricing and promotion strategies,” he notes. “Everybody wants to be the cheapest. And if those promotions and events aren’t planned ahead of time, manufacturers aren’t prepared. Even if the manufacturer has production ramped up to support it, the product still has to get through the network into the store. So if you’re not planning your replenishment through the supply chain of goods for a promotional event, then you’re going to have product shortages.”

In some cases, Elrod has seen retail merchandising executives make decisions about new promotions on the fly during weekly meetings, with the expectation that the changes will immediately take place — and without communicating those changes to their vendors.

While there may have been extensive amounts of joint business planning that already took place between the retailer and the customer, these types of short-term tactical decisions can create all kinds of inefficiencies, according to Elrod.

“Three-way collaboration through joint business planning is the answer,” he advises, “because ideally, if you start with the premise that the manufacturer wants to sell as much as possible, if they have any sense as to how much the retailer is going to buy, they’re going to produce to that number — barring labor disputes, factory tragedies, etc.”

3 Food Safety/Security

Plenty has been written in PG’s pages about the industry’s food safety and security challenges, and nowhere does this issue come more into play than the supply chain. Tankfully, some of the country’s largest fresh food suppliers have taken significant steps to implement safer measures in the fields, to improve product tracing, and even to enhance packaging, to ensure safer food for consumers.

Meanwhile, everyone’s waiting to see how the implementation of the U.S. Food and Drug Administration’s proposed Food Safety Modernization Act will pan out, with one of the latest reactions being the Newark, Del.-based Produce Marketing Association’s call for increased funding of the food safety budget, as well as a national integrated food safety system.

At least one industry player is calling on CEOs of food companies to step up in a major way. In a recent piece published in Forbes magazine, Bill Marler, often described as the most prominent, powerful and influential food-safety attorney in the country, makes the case that CEOs need to engage with food safety issues at the highest level.

“It is one thing to read or view media reports on the latest foodborne illness outbreaks and brand-damaging product recalls; it is quite another to really understand the widespread, adverse impact these incidents have on your consumer base, on your employees, on the efficiencies of your operations and, ultimately, on your bottom line,” he writes.

“To be successful, food companies are now in the business of managing risk,” asserts Marler. “This means garnering a good understanding of why food safety is important to your business, what risks there are to the business, how you can mitigate or eliminate those risks, and how in doing so, the food safety program will provide a return on your investment.”

This is certainly one area of the supply chain that will continue to warrant attention among food companies, and will no doubt remain top of mind for consumers as well.

4 Human Resources

No matter how fancy retailers’ and suppliers’ supply chain solutions may become, there will always be a need for human talent to keep the supply chain strong. Good people are not only key to keeping the overall retail operation running smoothly, they’re also needed to fill special roles that require talent outside of the traditional grocery arena, specifically in the area of technology.

In RILA’s “State of the Supply Chain” report, talent development ranked second among areas of planned supply chain investment, coming behind omni-channel fulfillment and before technology. “People and technology will be prime areas of investment in 2015, as retailers need top-tier talent and omni-channel-capable tools to manage the growing complexity of the retail environment,” the report suggests.

Of course, omni-channel isn’t the only area where talent will be required. Many retail organizations still lack the human capital to effectively manage their transportation in-house, according to Transplace’s McGuigan. Of those companies that decide to control their own supply chain, many understaff and under-invest in the critical areas that make up a company’s transportation and logistics function, he says.

This leaves companies in a position in which they often miss critical order and delivery data, and ultimately lack visibility or expertise to develop and quickly execute strategies.

Even talent to fill supply chain roles is lacking. According to Deloitte Consulting’s 2015 Supply Chain Survey, only 45 percent of supply chain and 40 percent of procurement executives at U.S.-based global companies say they’re extremely or very confident that their supply chain organizations have the competencies they need. The survey found that CEOs and presidents were much more confident in their company’s talent, suggesting a wide disparity in how leaders view the organization versus how supply chain professionals see it.

“Today’s global economy demands a networked and efficient supply chain,” says Kelly Marchese, principal at New York-based Deloitte Consulting LLP, and supply chain strategy leader. “The disparities in viewpoints that exist between company leaders and supply chain professionals could materialize into actual barriers to success, particularly as companies try to evolve their supply chains through new technologies and operating model changes. Approaches to talent management must evolve with supply chains to ensure today’s workers can meet tomorrow’s challenges. That can only occur if executives at every level are informed and in agreement when it comes to their talent needs.”

5 The Omni-channel Challenge

The last weak link in the retail supply change is a big one — figuring out the best ways to ensure ordering, fulfillment and last-mile delivery to the growing number of consumers who want to order groceries via the internet, on their mobile phones or even with their watches. Indeed, the desire for anytime, anywhere grocery shopping isn’t going away, as evidenced by Amazon’s growing investment in the food sector.

In the past several years, retailers have quickly realized that to serve customers profitably across channels, separation isn’t the solution, according to RILA’s “State of the Supply Chain” report. Rather, “integrated systems, shared inventory and flexible facilities will drive greater customer engagement and company profits,” the report notes.

Establishing omni-channel growth was the No. 1 strategic priority among retail supply chain executives who were interviewed for the study. Of course, the growth in online retailing has been much more rapid among nonfood retailers, but that doesn’t mean that grocery is of the table.

A key takeaway from the study puts the current reality of omni-channel growth in perspective: “Although a few major retailers have the demand volume to fully segment their fulfillment channels, most retailers in our study are strategically pursuing alignment between online and in-store inventories, balance between service and cost, and collaboration between functions. They are also investing heavily in processes, people and technology to ensure that dynamic fulfillment capabilities are established. Their goal? Supply chain executives want to build flexible networks that can effectively and profitably serve demand from anywhere in the supply chain.”

If retail companies can do that, it seems likely that their supply chains will stay strong for years to come.

“The nation is over 50,000 drivers short right now, and is expected to be literally a couple of hundred thousand drivers short within the next 35 years.”
—Dan Elrod, McLane Co. Inc.

“As a result of increased regulation, and industry capacity challenges, grocery retailers and CPG companies are experiencing some of the highest freight costs they’ve seen in recent history.”
—Frank McGuigan, Transplace