Food-service company says 15% reduction in errors fueled strong quarter

Mary Hayes Weier, Contributor

March 4, 2003

3 Min Read

Sysco Corp., the nation's largest food-service distributor, credits IT systems used in ordering and delivery for helping it produce strong quarterly earnings during a tough time.

The $25 billion-a-year supplier of some 15,000 products to restaurants, hotels, and schools cut its operating expenses as a percentage of sales by one-tenth of a percentage point for its third fiscal quarter ended March 29. A significant part of those savings came from an automated order-selection system that reduced errors, Sysco says. The system also improves customer satisfaction, which might help the company gain market share as its main rival copes with an accounting scandal. "Our customers expect error-free orders, and more perfect orders translate to an additional competitive advantage," says Thomas Lankford, Sysco's president and chief operating officer.

Sysco's performance for the quarter is unusual in the food and beverage industry, where single-digit growth is considered good. In a quarter in which dining out and leisure travel were hampered by snowstorms on the East Coast and war in Iraq, Sysco reported net income of $168.4 million, up 11% from a year ago, and sales growth of nearly 14% to $6.4 billion.

The company's gross profit margin actually dropped two-tenths of a percentage point for the quarter, a decline offset by cost cuts. It reduced the number of order errors in cases of food shipped by 15% from the previous quarter, assistant treasurer John Palizza says. When the wrong products get shipped, Sysco must pay to have them returned and restocked. Though Sysco has been rolling out the system for the past few years, with steady improvements in order errors, the quarterly jump is likely because about half of Sysco's 87 operating companies now use the system, he says.

With this system, which replaces a manual, paper-based one, salespeople send orders from the field by radio frequency to portable computers installed on forklifts. Screens on the forklifts tell warehouse workers where to locate the products. A bar-code scanner attached to a worker's finger confirms he has selected the right item, and a tiny printer on his belt generates a label with order details that's attached to the case of food.

Andrew Wolf, an equities analyst at BB&T Capital Markets, says Sysco's focus on cost structure is comparable to that of Wal-Mart Stores Inc. "A lot of where profit comes for these companies is having excellent IT systems for controlling inventory and lowering operating costs," he says. Like Wal-Mart, Sysco doesn't reveal many details about its IT systems; Sysco's order-selection system combines vendor and in-house-developed technologies, and it uses a commercial vehicle-routing system, also touted for cutting costs. The company declined to name the vendors.

Improved customer-satisfaction is equally important during a critical time in the food-service business. Sysco's largest competitor in a highly fragmented market, U.S. Foodservice, is owned by Royal Ahold, a Dutch company under investigation for accounting irregularities, including its recent admission that U.S. Foodservice overstated profits by at least $500 million. Analysts say Sysco is in an ideal position to take customers from U.S. Foodservice, which has sales of about $17 billion a year.

Sysco's operating companies use nearly 9,000 trucks, each making about 10 deliveries per day. Its vehicle-routing software, which helps the company find the most efficient routes, is also in a rollout phase that's taking a few years because each Sysco operating company makes its own IT-investment decisions. Sysco relies on early adopters to spread the word to other operating presidents if a system is delivering a significant return. Says Palizza: "It takes longer that way for a systemwide rollout, but people have really bought into it because they've made the commitment themselves, as opposed to having something mandated from headquarters."

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