Imperial Cold Logistics and Resolve Solution Partners – Transformation of distribution in the FMCG Cold Chain
ICL’s core services include warehousing, inventory management and distribution solutions for a unique product category with very stringent logistics requirements. In order to create the most cost-effective offering for the market, the business model offers a shared infrastructure solution, whereby an optimised and practical service can be offered to manufacturers of these products and their distribution in to the retail footprint. Notable customers include McCain, Astral Foods and Lancewood Cheese.
The business problem
Due to a combination of macro- and micro-economic factors, the South African Retail and FMCG market have been under significant financial pressure for a number of years. ICL was no different, having to deal very quickly with the following challenges:
- Margins were under strain as a result of changed distribution demographic (advent of the retail DC’s), and the business was in an unprofitable situation
- Network and facility costs for the 11 national warehouses were high and debilitating. In addition to costs the large number of sites also contributed to the following issues
- Inconsistent process and discipline applied across
- Depth of management
- Consistency and reliability of customer service
- Prohibitive cost of change in terms of process and system change
- Charge methodology didn’t encourage the correct behavior, charge methodology was predominantly based on % of revenue this
- Profitability of some of its principals was questionable
- Some so the distribution channels were not profitable, the customer tail had grown extensively for an extended period of time without questioned which had resulted in 35% of the distribution activity resulting in only 5% of the volume delivered
- Sufficient synergies weren’t being obtained from volume distribution network was dominated by unique principal drops (customers were being serviced for only a single principal) – approximately 43% of all deliveries were unique to a single principal.
Central to the concerns for ICL was their extensive supply chain network. They were operating through 11 facilities throughout the country, on top of an expensive fleet of trucks. In addition, the management and execution of customer’s orders was thought to be causing inefficiencies.
ICL contracted their peer company, Resolve Solution Partners, to assist in re-defining an operating model which will improve the business’s financial situation and improve its service offering to customers. Resolve, also an Imperial Logistics’ company, is a professional services company, focusing on advisory and outsourced services in the Supply Chain arena.
Resolve performed an overall Supply Chain assessment on the current ICL network and operations, identifying the key drivers of performance and associated improvement opportunities and the business’s challenges in more detail.
This assessment went into great detail on:
- Current network design, and associated cost drivers
- Current network capacities and constraints
- Principal review and profitability assessment along with link to capacity utilization, principal “suitability” with total ICL network principals were grouped into 3 categories “Keep”, “Refine” & “Remove” a specific program for each principal was designed. Specific focus was applied to retaining and improving service and extending services and relationships to principals that were identified as key to ICL.
- Customer segment review and profitability assessment along with link to capacity utilization, customers were categorized according to selected parameters, specific actions were assigned to each customer bucket.
- Optimal network reviews were linked to changes in customer segments and principals multiple scenarios were run so as to determine. Assessment on possible changes to the network, and associated benefits.
- Detailed distribution efficiency analysis was conducted
The analysis focused on the following key areas:
- Structuring the most efficient network
- Improving ICL ability to differentiate itself in terms of customer service
- Consider scenarios to free up capacity in the network for a suitable principal
The Supply Chain assessment showed that there was significant value to be realized, both in efficiency and in customer service. It mapped out a number of initiatives and improvement projects with detailed operations implementation calendar and project plan.
The improvement initiatives were grouped, prioritized and sequenced and planned into the following projects
1. Change the Drop based approach. This was identified as the 1st step to change the network and freeing up capacity.
The key elements of this project was:
- Customer Rationalisation and then to fix operational and customer disciplines
- Must be process and system enabled (point of system departure) highlighting the need for centralisation of call centers & major changes in the ERP system.
- Focus on selected customer buckets drop behavior with biggest potential savings. Realize the savings by aggressively driving the changes through the following:
- SDA assignment & volume smoothing
- Immediate rollout of Resolve TMS to all sites – to enable optimized routing and adherence to plan as well as system generated fleet mixes and Service Day Assignments
- Address costing anomalies immediately and then review the opportunities for other operational efficiencies
2. Implement the Network changes and new Inventory management. The key elements of this project was:
- Stock required to be held at outlying sites (Possible consolidation of EL, GRG & KLK once base distribution activities (Drop and customer) as identified have been corrected
- Inventory optimisation and replenishment are key enablers to centralised stock holding model as well as being an enabler to providing a better customer solution
- Outlying areas require additional volume or further reduction in drops (increased MOQ is required), possible further site rationalisation is possible – to be full evaluated when operational improvements, customer and principal changes have been made
- Review of quality sub-contractors able to hold stock to be undertaken
3. Review the Rate structure. The key elements of this project was:
- The Rate structure at the time were driving the wrong behaviour and incentivised the principals to behave badly – changed when the base is settled
- Rates to be structured to represent the cost drivers. Pricing will then be related to activities performed.
4. System improvements and Operational visibility
- Operational visibility must be improved
- Operational dashboards must be developed
5. Expansion of core services
- Core services to be expended – Bulk solution to be implemented
- Platform for integrated S&OP to be setup with principals – can be a key differentiator
Scope and context of the Implementation
The recommendations were implemented as follows:
1. Reducing the “customer tail”.
- ICL previously delivered to a customer universe of around 6500 customers per week. This was reduced by closing the accounts of the 1300 smallest customers in the delivery universe. A reduction of nearly 20% in the delivery fleet was achieved will a loss of only 1% of distribution volumes.
- Implementing a minimum order quantity of R6000 per delivery per customer for a period of 2 to 3 months after the initial review of the “tail”
2. Closing remote distribution centres
- The distribution centres in Klerksdorp, Dundee, East London and George were closed and customers were serviced from the adjacent distribution centres.
- Far country delivery fees were recovered from Principals for deliveries to customers in the Klerksdorp, Dundee, East London and George regions.
3. Implementation of a state of the art Transportation Management System managed by Resolve.
- Transportation plans are developed daily based on the output of a specialised route planning and optimisation system.
- Transportation plans are expedited in real time by a team of expeditors.
4. Weekly volume smoothing was implemented to ensure that equal numbers of trucks are used to deliver stock on all the days of the week.
This implied that the nominated delivery days of some customers had to be moved to days in the week where ICL had historically low
This had a dramatic impact on the operations:
- Fewer rental trucks were required to cater for days in the week with high deliver volumes than others.
- Vehicle utilisation was improved.
- Warehouse activity was similar on all days of the week which improved warehouse productivity.
- Fewer temporary staff were required to assist with high delivery volume days.
5. Implementation of Activity Based Fees to address the cost impact of Principals that were either not generating sufficient revenue, or that were causing excessive distribution costs. This included:
- Overstock storage fees which applied to stock that was stored in excess of the contractual requirements
- After the initial 3 month period, the minimum order quantity was replaced by a “small drop delivery fee” of R500 per delivery which was applicable to customers that could not order more than R10 000 per month. Principals were encouraged to discontinue the deliveries to unique or small customers, or alternatively bear the full distribution cost of deliveries to these customers.
6. Implementation of a state of the art Demand Planning system, and centralising the demand planning process. This allowed ICL to optimise the utilisation of warehouse space and reduce lost sales as a result of out of stock situations. This resulted in an improvement in outbound service levels of between 3% to 5%. Furthermore, ICL’s outbound service levels consistently started to exceed the inbound service levels from its Principals.
7. Implementation of standardised weekly operational scorecards that were circulated to all levels of the organisation, to Principals and to the Retail Customers.
These scorecards includes:
- Inbound service levels
- Stock levels and analyses of overstocks, excess stocks and potential stock-outs
- Outbound service levels
- On-time service levels
- Analysis of lost sales
Results Achieved to Date
Improved distribution efficiencies as a result of operational disciplines and customer order management:
- Vehicle utilisation has improved by 22%
- Resulting in a reduction in fleet of 22%, i.e. 50 trucks were removed from the fleet which resulted in a cost saving of close to R35 million per year.
- Fleet size has been reviewed at Major sites enabling the correct vehicles to be purchased resulting in spare capacity at minimal cost, enabling ICL growth strategy.
- On-going SDA have been completed resulting in smoothed distribution activities and improved customer service
- ICL complete distribution visibility in terms of service & costs has become a further enabler for Principal negotiation and growth
- Unique and small customer deliveries were addressed by closing 1300 of the smallest “tail” customers which resulted in a loss in sales revenue of 1% but a saving in transportation costs of 15%. (this is included in the 22% above).
- “Small Customer Delivery Fees” were introduced which covered the cost of the remaining unprofitable deliveries to small customers.
- The implementation of activity based fees such as “overstock storage fees” to address specific unprofitable customers generated 5% additional logistics revenue per year. Principals that operated within the contractual limits were not significantly affected by these fees.
Improved network, operational behaviour and capacity as a result of customer and principal rationalisation has resulted in ICL being able to sign McCain as a principal
Because of the operational and financial turnaround of the business, the shareholders regained their appetite for significant capital investment in the business. This enabled ICL to develop the largest commercial frozen bulk store in South Africa. This will enable ICL to expand its services to customers to include finished goods cold storage and primary logistics.
ICL recently embarked on a project to provide detailed input in the S&OP processes of key principals. This requires close collaboration between ICL and the sales teams of its Principals.
ICL is planning to implement SAP in its business in August 2015. This will provide ICL with the platform for further optimisation of its business, as well as the introduction of bulk storage and primary logistics services to its Principals.
Holistic approach to problems lead by business and operational teams meant that opportunities identified by analysis were implemented at an acceptable base to operations and in the correct sequence.
All proposed changed were interrogated from a commercial perspective to ensure that these made sense to the bottom line and that potential bottom line risks were identified.
Continuous review of changes implemented meant that modeled solution was quickly refined to optimal operational realities.
As the change program was implemented successfully the program gained credibility with operations and further momentum for the program was gained by operational inputs and recommendations.
The Team involved
IRL Executive team; IRL Operations team; Resolve TMS team; Resolve Consulting Team