A Diet Of Reengineering

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FOOD PROCESSING
A Diet Of Reengineering
Food processing companies turn to client-server to trim their inventory costs

By Philip J. Gill
Issue date: Sept. 18, 1995

ood processing companies are on a diet. The goal: Cut the fat from their distribution chain, trim bloated inventories, and r educe the time it takes products to reach consumers. The diet: Business process reengineering through the use of open client-server systems.

"As a whole, food processors today are improving the efficiency of their operations," says Bruce Richardson, VP of research at Advanced Manufacturing Research Inc. (AMR), a Cambridge, Mass., consulting firm. "The focus today is on cutting the order-to-delivery time. Most [companies] have already improved quality. Now they're concentrating on eliminating the fat from food chain distribution."

Food processors have a tremendous incentive to shed the flab. Today, it takes an average of 104 days for a product to work its way from the plant into consumers' hands, according to a study by Kurt Salmon & Associates, an Atlanta-based management consulting firm to the retail, soft goods, apparel, and food industries.

During those 3-1/2 months, the food processor is invariably the one who bears inventory costs. If manufacturers could cut the float to 62 days, a wides pread industry target, they could save a total of $30 billion, says Jay Mabe, principal at Kurt Salmon.

"There's a huge opportunity to cut costs because of the number of hands goods pass through," adds Mabe.

From the outside, the food processing industry appears to be lagging in applying information technology to solve such business problems. But that may be because few IT executives want to talk about their internal systems and practices, ostensibly for fear of giving the competition an edge.

Insiders and analysts offer another explanation. Today's large food processors are conglomerates, often pasted together haphazardly through mergers and acquisitions. As a result, authority is widely diffused to highly independent operating units. Thus, chief information officers often appear to have little authority over IT, except to set broad guidelines.

Independence Days
On a day-to-day basis, most food processors operate not as one large firm but as a conglomerate of many smaller, indepe ndent business units, usually divided along brand-name product lines. Typically, each unit has a high degree of independence, maintaining its own marketing, sales, production, and IT operations.

Although best known for its baked goods, Sara Lee Corp. in Chicago is actually a diversified conglomerate whose multiple brand-based business units operate independently. Besides frozen baked goods, the company makes and distributes Jimmy Dean sausages, Hillshire Farms, and Superior coffee, plus a variety of personal products such as Hanes underwear and Champion sportswear.

Jerry Matsumoto, executive director of IS, says while the corporation sets broad policy guidelines, each business unit operates its own IS department. Virtually all are taking part in Efficient Customer Response (ECR), an industrywide initiative that aims to provide more effective product promotion, delivery, and introductions. Various Sara Lee business units are also engaged in electronic data interchange (EDI), bar coding, category manage ment, and data warehousing.

Using EDI and bar-coded palettes, Sara Lee provides "cross-docking" services to some customers. Sara Lee's trucks deliver bar-coded palettes directly to a customer's loading docks, where goods are loaded onto trucks for delivery to stores. This eliminates the need for customers to warehouse the goods themselves, Matsumoto says.

Because of their independent structures, food processors' grades in IT don't compare well with other industries. "You may find one or two that [grade] A in certain areas, and Cs and Ds in others, but none of them have Bs across the board," says Chris Jones, director of applications solutions at Gartner Group Inc. Jones should know--he was an IT executive at Kraft General Foods before taking a position at the Stamford, Conn., advisory firm.

Analysts say most of the pressure for change is coming from the bottom. Powerful retailers, particularly Wal-Mart, the nation's largest, are demanding changes in the way they interact with food processors.

"First, it was 'Customize the pallet for me so I can just unload;' now it's 'OK, you have five operating units, but I want to deal with you as one,'" says Henry Bruce, VP of marketing at Industri-Matematik Inc., a Swedish supply-chain management software vendor with U.S. headquarters in Tarrytown, N.Y.

Retailers can force these changes because they're far more powerful than in the past, analysts say. Even a company that dominates market share in a food category caters to a Wal-Mart because of that retailer's immense buying power.

In the past, food processors haven't been as cost-conscious, largely because their margins and profits were so large. Not so for their distributors and retailers: Grocery stores typically operate on a 1% to 2% margin, making up for that on volume. Their concerns for efficiency and cost controls are being passed up to food processors. The processors, concerned about even small changes in market share, have responded with the ECR initiative to give customers what they want, whe n they want it.

"ECR will establish standards and protocols for communications and operations that will get costs out of the distribution pipeline," says Jerry Gregoire, VP of IT at PepsiCo's Pepsi-Cola division in Somers, N.Y. But Gregoire and others admit those standards are three to five years away

In the meantime, some fledgling ECR efforts are relying on the availability of packaged software and open systems. Enterprise resource management (ERP) software passes a common base of data from the stores through distribution and warehouses to manufacturing plants. It tells food processors what they should be making and how much of it, then distributes that information throughout the organization.

ERP accounted for $4 billion in worldwide hardware and software sales last year, according to AMR, but Richardson says food processors accounted for less than 15% of those sales.

In contrast, supply chain management--estimated by AMR as a $200 million market last year--links a food processor's distrib ution centers to grocery store shelves. It provides what food processors and retailers call CPR (Continuous Product Replenishment)--the equivalent of a just-in-time approach to grocery store inventories.

Specification management is the least developed and smallest market--so small, in fact, that no market research firm now tracks it as a market separate from general document imaging systems.

These strategies all rely heavily on open system, client-server technologies. Campbell Soup Co.'s reengineering efforts wouldn't be possible without open systems, says Paul de Janosi, director of customer service systems at the Camden, N.J., company.

Earlier this year, Campbell embarked on Project Compass, a complete reengineering of its internal IT operations to provide better focus on customer service and order fulfillment. When the project is completed, Campbell will have an integrated, soup-to-nuts system that will provide sales order processing, customer service, order fulfillment, and transportation ma nagement. All departments will share a common Oracle7 relational database, running on Unix servers. Users will access the database from PCs running Microsoft Windows 95. Savings will be a minimum of $18 million the first year of operations, and order fulfillment will be cut from days to hours.

By using open systems, such as Industri-Matematik's System ESS supply-chain management package, Campbell has been able to pick the best software in each application category, from supply-chain management to ERP and traffic management and logistics.

Many food processors' hopes ride on innovative use of IT. Those that trim the fat from their distribution chain stand to gain market share. Those that don't get leaner will find the marketplace a lot meaner.

(To view the Food Processing chart in PDF format click here)

Photo for InformationWeek By Chriss Wade

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