Distribution: The Last Bastion of Significant Savings?
For an industry that produces products woven into the core fabric of life for which there will always be plenty of demand, the fresh baking industry seems to perpetually be under a lot of pressure. Not a day goes by without reports of ingredients reaching record high prices, or a new low/no-grain diet announced. Not to mention the fiercely competitive nature of the industry itself, heightened by the increased power of retailers, the introduction of in-store bakeries and the rise in production of artisan bread. It becomes increasingly difficult to make a decent buck selling commercially baked bread.The margin is determined by the price the customer is willing to pay minus the costs of getting the product to that customer. Price is always under pressure from ever-increasing buying power of the food retailers and competition. Of course, quality and choice of ingredients and new, innovative products allow for some differentiation, and thus, price flexibility. But cost is the place manufacturers most commonly look to increase profitability.
The main “buckets” that make up the cost of a loaf of bread are ingredients, production costs (including overhead) and the costs involved in getting the bread to the paying customer or distribution costs.
One of the downsides to the globalized world is not that ingredient prices today are set at the will of forces out of the manufacturer’s control, but rather the result of a myriad of events, such a weather phenomena, crop predictions and demands playing out in parts of the world such as China and India. Generally speaking, ingredient prices do whatever they want.
The focus of the industry has been and continues to be on reducing production costs of bread. Huge production efficiency increases and reductions of production waste have been realized over the past 20 years. Production lines are extensively automated. Walking through any modern production facility today, one can’t help but be amazed at the limited amount of personnel on the production floor as the products roll off the line by the thousands.
The ongoing market consolidation that has been taking place for decades is another result of the efforts to lower production costs. Market consolidation increases production volume in the remaining factories and allows for greater economies of scale.
Interesting to note is that with most wholesale bakeries, bread is still being distributed just as it was 100 years ago, using pen and paper and a lot of labor. There are tremendous opportunities to affect the bottom line and improve the quality offered to the end customer on the other side of the production wall.
Why is it then that this is an often overlooked aspect of the business in regard to modernization and continuous improvements? Is it because many don’t feel technology can be flexible enough to deal with the dynamic nature of order fulfillment and bread distribution? Or is it because companies don’t think the potential “real” opportunities to affect and improve the business aren’t there? Whatever the reason, many organizations are not taking the time to look at what can truly be accomplished to improve business in the distribution side of the plant.
Getting the product to the end customer is probably the area that still has the most potential for savings, and technology is the key to unlocking them. Paper-based order-fulfillment processes are very error prone; they are also really inadequate to deal with the highly dynamic nature of fulfilling large numbers of
ever-changing orders and matching them against ever-changing production volumes.
Computer-based solutions can adjust product allocation dynamically based on priorities set by the user.
No paper adjustments need to be made; the process happens quickly and accurately.
Another benefit of today’s systems is traceability. Each time a product is handled, the warehouse operator has to confirm this in the system. These “checks” improve order fulfillment accuracy, which improves customer service levels, eliminates the need for extra truck runs and reduces “unaccounted for’s” to nearly zero. Some distribution solutions even offer automatic scanning of product onto the delivery trucks and product scanning when it is received by the end customer or depot. It is very common to see a savings of up to 30% in warehouse and distribution costs when these new systems are installed and incorporated in the daily business process. Payback periods of 12-18 months are the norm. For these reasons and others, it truly makes good business sense to evaluate the positive effect modern distribution systems can have on the bottom line. Distribution may be one of the last bastions and unknown areas of significant savings opportunities in this industry.
Editor’s Note: Marc Braun is the president at pcdata Inc., East Granby, Conn. For more information, go to www.pcdatainc.com.
