October 13, 2008 — At the recent IFDA Foodservice Distribution Conference & Expo in Pittsburgh, a panel of leading distributor executives addressed economic and industry concerns that are shaping foodservice distribution. The general session included panelists (left to right) Jeff Braverman, president of Hawkeye Foodservice Distribution, Iowa City, IA; Mike Roach, president of Ben E. Keith Foods, Fort Worth, TX; Tom Zatina, president of McLane Foodservice Distribution, Carrollton, TX; and Mac Sullivan, CEO of Pate Dawson Company, Goldsboro, NC. Steve Potter, (far left) IFDA’s senior vice president of industry relations, moderated the session.

Today’s Economy
In the context of the evolving financial crisis, Mr. Potter opened the discussion by referring to the 1929 stock market crash and subsequent depression, asking members of the panel how today’s financial crisis differs from that event.

Mr. Braverman noted that the present challenges for distributors have been building for a number of years. In an industry with already low margins, foodservice distributors have “faced high energy costs that have been ratcheting up, challenges in attracting good people and having enough drivers, and now tight economic conditions that are causing some real concern for our customers — all of these things kind of build into a ‘perfect storm,’” he said.

An important consideration, said Mr. Roach, is that unlike 1929, we really do live and operate in a global economy. “There are therefore headwinds pushing against us that make these issues harder and more complex to face,” he said, “and that may make a recession harder to pull out of, but I think in the end we will see greater collaboration among global financial institutions and global markets.”

“To Mike’s point,” said Mr. Zatina, “we’re already seeing collaboration that I don’t think has ever occurred before in these broad, global financial matters. That said, I do think there are differences that work to our advantage here. Fundamentals are still basically sound in a lot of businesses.”

He also noted that the speed of communication is a double-edged sword. “It’s interesting today that when something happens, probably 98 percent of people in this room know about it within 30 minutes, and if you wait a little longer we’ll know what everybody thinks the ramifications are,” said Mr. Zatina. “That level of communication can add to the alarm and the sense of urgency, but it can also add to the understanding.” He believes that it will be necessary to reverse the trend to pessimism. “There has to be some optimism because at the end of the day this thing really gets driven and fueled by pessimism on behalf of all consumers and we need to reverse that tone.”

Mr. Sullivan added that rather than comparisons to past economic crises, we should focus more on what the lay of the land looks like now and how we can move forward. “All of us realize that we have less disposable income — that’s been true ever since gas has been going up — and ultimately that means there may be less eating out opportunities and there may be less restaurants for a short period of time. That means we have to focus even more on operational excellence because we have to drive costs out of the system. We must continue doing what we have been doing, but understand that these efforts are even more critical because of where we find ourselves today. All of us within this industry want to come out on the other side of this strong and ready to participate in a growing economy,” he said.

Helping Customers Weather the Storm / Necessary Change
Mr. Potter asked the group what steps they were taking to help their customers in an economy that is bringing declining demand and rising costs.

Mr. Braverman responding by saying that distributors have to manage their resources well and do the fundamentals of business better every day. “We have been doing a lot of these belt-tightening moves as our industry consolidates and we all get better at what we do. I don’t see any magic bullets,” he said. “One thing that I think will make this economic time different is that there won’t be as much margin for error. There is no margin for error for misallocation of resources or if you do things that are not good business practices.”

One thing that can be done, Mr. Sullivan said, is to help customers understand the value of using a primary or sole supplier. By doing so, “our profits can become mutually inclusive with our customer, and we have the opportunity to apply resources within our organization or even outside of our organization to focus on our customers profitability, to focus on managing their cost of food. When our customers split what they buy to four or five different distributors, nobody wins in that scenario, and a lot of our industry works that way, especially when we are looking at independent restaurants. The chains have already figured this out. They have already moved to sole source and we need to convince our independent customers to move in the same direction because it will be part of what I believe will be their salvation.”

This begins with a well-trained, professional, and focused sales force, added Mr. Roach. “That sales force, those DSRs [Distributor Sales Representatives], are the maintainers of the relationship that we have as distributors with our customers,” he said. “The first thing that we try to do is make certain that our sales force understand the basic financial economics of foodservice distribution and understand the same things about the business of a restaurant group or an independent operator. DSRs can then talk to that operator in economic terms, not just sell product and price and service. They can help the operator understand the things we as distributors must do and why they are important for that operator.

“We all realize that the margins are greater [with independent operators] than they are with chains,” said Mr. Roach, making them a vital part of the overall health of the industry. While chains have spent a tremendous amount of money understanding why people come in the door and why they order what they order, the independent operator doesn’t have those resources. “The independent operator then looks to us to provide those same types of information and … is therefore asking us to co-invest in their business. I think that has become, what we, as distributors, are really all about. Chains have different needs and we certainly want to provide those needs, but understanding the needs of the independent operator, understanding the economics of the foodservice distribution business, having a well trained sales force that can convey that and help the operator become successful, is one of the things that we need to do as an industry.”

Mr. Zatina, whose company is a systems distributor to large chains, noted that his business has a different twist as they are, by nature, the principal supplier. “Since we bring just about everything into that restaurant, there is a lot of pressure on us to do it right because there is not a second or third supplier they can rely on. We have a lot of emphasis in our business on superior execution … [and we] run our business with the assumption that if we do our job well, then our customer can focus on being a great operator or restaurant. We have to focus on that every single day, and on every single delivery, because … if we make an error, they don’t have another place to go. And if we need to fix it, it’s going to add cost to our system to go out there and make a re-delivery. In these times we think the best thing that we can do is take all the worries off the back door, and let those folks run good restaurants.”

Mr. Potter asked panel members if any changes were underway for distributors, particularly in the way they view time windows and sequencing of routes.

Mr. Roach replied that at Ben E. Keith changes are already being implemented in the warehouse and with deliveries. “We don’t deliver to everybody at 7:00 in the morning anymore,” he said, and added that DSRs are in a position to be proponents of change that management has to put into place.

“Certainly the number of deliveries, the frequency of deliveries, the hot shots, all of those things do and are going to have to change. And I frankly see that as change for the good,” said Mr. Roach. “I think that perhaps, as an industry, ... we have had the attitude that we don’t have the word ‘no’ in our vocabulary when it comes to service and to the number of products that we carry, the variety of products we carry, the duplication of items that we carry. My favorite example to my folks is the 37 French Cream Cheesecakes that we carry.”

As these changes happen, Mr. Roach cautioned, the survival of the independent operator must remain as a fundamental. “We all are going to try to do things that lower our costs on the transportation and delivery side, but at the same time we’re going to work with our operators and collaborate with them to make sure we aren’t creating any problems for them.”

“We have to collaborate within our organizations, as well,” said Mr. Braverman. There needs to be interdepartmental communication, such as between the sales force and the transportation department, and it has to be a mutually beneficial move. The next step is “to talk to our customer and explain to them why this is necessary for us to do, and what’s in it for them. That’s an interesting discussion sometimes, because sometimes there isn’t anything in it for them. We have to be realistic about the profitability of that customer before we go out and talk to them so that we know how hard we need to negotiate to make that change happen.”

Mac Sullivan added that distributors should consider all their options, such as looking at more keydrop deliveries with customers, for example, as a way to reduce cost. “We may be used to doing that on the chain side or we may be used to doing that when we are in a large city because we’ve got to get in and out of that city early, but there may be other opportunities to use that as a more efficient way of transporting goods to our customers.”

Credit and Keeping Customers Current
Tightening operator cash flow and credit policies to customers were also discussed in light of the changing economy.

Tom Zatina was the first to address the issue, noting that the current economic situation coupled with the higher commodity prices has put pressure on a lot of operators. “It doesn’t matter if they’re a QSR franchisee or if they’re an independent operator, they are paying more for dough and they are paying more for proteins and it’s putting a squeeze on cash flow, particularly in those cases where they are not able to react with pricing quickly enough or effectively enough,” he said.

“In this kind of environment, it is very easy for our customers to start looking to the distributor to be the bank, and to provide a source of financing. We have to be pretty judicious about how we deal with those things. You don’t want to do things now that you’re not willing to live with because that can be damaging long-term to the health not only of your company, but, of the entire industry.” That means managing credit pretty tightly right now while still taking into account things that we need to do to be good partners with our customers, he said.

Mr. Roach said that it is in the best interest of operators to pay their bills on time. “As a company, we have always had the reputation that we are somewhat rigid when it comes to credit. We work very hard at trying to keep all of our customers current, but we all know how those things can slip away from you,” he said. “ If you really have your ear to the ground and you really are observing what’s going on with an operator, you can pick up on little things that tell you that maybe things aren’t quite as good with that operator as they used to be. In those cases, you have to be willing to take steps to bring that account back into current.”

Fuel Costs in Transportation
Mr. Potter shifted the focus to what companies are doing to control fuel and energy costs, noting that while distributors can’t control prices, they can control consumption.

Everyone has started with route consolidation to conserve fuel and trying to expand time windows, Mr. Roach said. “We are having those conversations with customers to help them understand the economics of our business, to cut down on the number of deliveries, and the number of hot shots.” Eliminating reasons to have to go back to the customer by delivering the order right the first time, is vital, he said. That includes making sure the order is correct before it’s transmitted and that the sales rep has visibility into the order if the account is on a direct order entry system.

More proactively managing the driver force is also important, he said, such as using onboard computers to monitor a driver’s speed and other factors. “We also certainly want to have it in the drivers mind that customer service is the key, the most important thing, but their efficiency and productivity also really has to come into play at that point of delivery.”

Reducing idle time by monitoring through onboard computers and governing engines to reduce speed can “make a huge difference,” Mac Sullivan said. At Pate Dawson, speed has been “reduced to 62 miles-per-hour, because you’ve got to focus on the miles per gallon as fuel costs have gone so extraordinarily high. You have to change some of the things that you do because you can’t take for granted that fuel will ever be back at two dollars per gallon – you have to assume that it’s going to be high for a long time to come.”

Mr. Zatina agreed, noting that McLane Foodservice Distribution trucks across the country are governed to a 62 mile-per-hour speed limit. “We see a definite improvement in our miles per gallon since we’ve done that,” he explained, “but as important as turning it down to 62, has been the dialogue that we’ve had with our drivers about the need to get better mileage. Hand in hand with turning them down to 62 is an increased awareness that the drivers now have about what they bring to shifting, and what they bring to idle time, and other maneuvers that bring that MPG to a higher level.”

Distributors should also look at their tire program, Mr. Zatina said. “Tires can have a big impact on your MPG, and now is a time to pay closer attention to what we are doing with tires and how well we are managing our tire program, because they do count.”

Jeff Braverman noted that his company has taken structural steps to also help with fuel costs by implementing a two-tiered stop charge program. “At this point we’ve never said ‘No’ to a delivery, no matter what the size, but we’ll charge you an additional stop charge if it’s a certain size. It’s helped us cut down on our small deliveries and we’ve seen an increase in our average order size.”

Another structural change: “Our company’s sales commission system pays our reps based on the amount of gross profit dollars they generate per stop,” said Mr. Braverman. “Teaching that time and time again, and repeating it so that they understand that they control their profitability and the company’s — that they are an allocator of resources — helps them make wise decisions in developing their relationships with customers.” This has an important impact in generating the sales rep’s income, underscores how they allocate the resources of the company, and makes it clear that becoming a prime supplier or an important supplier has a tremendous impact on the company's profitability.

Energy Costs in the Warehouse
Steve Potter noted that some distributors have seen energy cost spikes of as much as 40 percent in the last two years and asked the panel members what their companies are doing to control and reduce energy consumption and costs in the warehouse.

“We’ve set out to re-lamp all of our warehouses and we have seen some very quick and dramatic payback from that investment, so much so that we are doing as many as we can, as fast as we can,” said Tom Zatina. The company is also taking a close look at insulation, from the roof to insulation between compartments, and making investments in high speed doors between compartments. It even gets down “to when we are turning things on and when we are turning things off,” he said. “You put all that together and it really does have a pretty dramatic effect.”

Mike Roach stated that his company has joined the U.S. Green Building Council and now has a LEED qualified Ben E. Keith construction/engineering manager. “We are working to get a body of knowledge that we didn’t have before within our company, to understand and really make rational decisions relative to energy usage. There are a number of things that you can do with the physical part of your plant, but then there are also other things that you can do that might cost you more downstream.”

Like others, said Mr. Roach, his company has explored solar panels, but is now looking at wind turbines. “We’ve done two studies now on wind turbines and I am told that particularly out in west Texas, where the average wind speed is something like 22 miles-per-hour, that we could generate up to 18 percent of what would be required for that distribution center.” He cautioned that while there are many “brass rings” out there, it’s important to be educated, to understand exactly what is taking place in your facilities, and to not “jump off into some technology” that could cost more down the road.

“This is one of the prime reasons that many of us come to a conference and an expo like this,” said Mac Sullivan,“because you are looking at everything from better dock doors to better seals to motion detection systems for use with lighting to solar panels. These are the types of things we need to explore.”

Jeff Braverman noted that sound sensors as well as motion sensors can provide solutions for reducing consumption. He also noted his company’s work with their electric cooperative, where capacity issues during summertime peak demand had led to electric generation companies asking for help from business costumers. “One of the programs we ran into asked if we could go offline with our own electricity generation within an hours notice. If we can do so, we receive a reduction on our charge per kilowatt. That has been a really good program for us. It’s not saving energy overall — we still need to run our facilities — but it does help to keep the cost of energy down for us and it’s been a program that we rolled out at our distribution centers.”

Helping Operators Understand Distributor Economics and Reducing Errors
Mr. Potter noted that delivery time windows and off-day deliveries both create additional costs, and asked panel members how their companies are working to help operators understand the economics of foodservice distribution.

That, said Mr. Roach, has to begin with the training and education of the sales force and taking a very focused approach to the costs of servicing each individual account. The sales force has to “talk in terms of profitability by stop, and understand the importance of profitability per stop. I think that puts the burden of responsibility on the sales manager. That hasn’t always been something that they have had to do, but it certainly is now,” he said.

As touched on earlier, said Mac Sullivan, “distributors must continue to help customers understand our business model as well as us understanding their business model. We have to help them see why a prime source is best for them, why it can help them manage their food cost better, why two deliveries is an overall lower cost model than three… [and] we’ve got to make sure that in that process we are meeting their needs.”

In reference to off-day delivers, said Mr. Sullivan, they “occur because either we have made an error or the customer has made an error.” In both cases, you have to find solutions. “We know how to solve our errors through finding out how to have perfect selection, and zero damage on our trucks … but as Mike mentioned earlier, we also have to look at the orders as they are coming in from our customers. His example was noticing that catfish was not going to be delivered to a customer that needs catfish every single Friday. We have to have systems in place that catch those types of things and not assume that the customer is going to put a system in place.” In doing so, said Mr. Sullivan, “we add value to the customer.”

Mr. Roach said that his company benchmarks shorts, miss-picks, sales errors, customer errors, and an all encompassing “other category” every week and sends reports out to each of the company’s six branches so each will know their performance in those critical areas. The benchmarking reports reveal the best practices within the company. “By benchmarking that, and really by rewarding our operations people, incentivizing them to have continuous improvement in all of those areas, that helps quite a bit,” he said.

That tracking is critical, said Jeff Braverman, but must be at a highly detailed level that provides clear answers from who caused the error to how the order was transmitted.

Inbound and the Need for Greater Collaboration
In the context of increased margin erosion and working toward operational excellence, Steve Potter queried panelists on what they are doing to gauge and improve inbound with their trading partners.

For Hawkeye Foodservice Distribution, Jeff Braverman said the primary thrust is scanning accuracy on inbound to help identify errors more quickly and more accurately and get that information back to the supplier.

At Ben E. Keith, Mike Roach said that effort is similar. “We are working with our manufacturer partners to provide them with instant and accurate data on what they are delivering to us, whether they are hitting their time windows, and whether their orders are complete.” Coupled with that is an emphasis on raising supplier understanding on increased costs created by a missed time window or an incomplete order.

“In some cases,” said Mr. Roach, that means “allowing them to participate with us in offsetting that cost — in other words charging them for it. And I think that they have gotten the message.”

Mr. Roach said his company uses scorecards with their supplier partners and are now using the IFDA Partners Executive Conference to heighten awareness. “We are now insisting that they begin to bring their logistics people to our top to tops that we have with them throughout the year. While the traditional relationship with manufacturers has always been at a sales level,” said Mr. Roach, “those days are gone. We have to have a complete understanding in this industry of what impact each of us have, as members of the supply chain, on the total cost to other members, and that is what collaboration is all about.”

“We tend to focus on what we can do within our four walls,” said Mr. Sullivan, “to reduce the number of errors, whether it’s barcoding at receiving, putaway, let-downs, so that we make sure that our errors are reduced. We measure our vendor’s performance, just as Jeff said, so that we look at their service level on cases delivered, we look at their on-time delivery like Mike said, and yet it has been difficult to get our vendor partners to understand how their inefficiencies in delivering to us affect the entire supply chain.”

Those inefficiencies include forcing distributors to carry significant safety stock. When “we start sharing this information with our manufacturer partners, their astounded at some of the numbers we share with them,” said Mr. Sullivan.

Within his company, said Mr. Sullivan, service level goals for operator customers are at a 98 to 99 percent level, yet inbound from manufacturers may range from 85 to 92 percent. “All that adds tremendous costs throughout the supply chain. We have got to do a better job of elevating the importance … [of this issue and] of getting information back to them rapidly. The clean and accurate data project that IFDA is working on with IFMA is very important.”

Mr. Zatina stated that scorecarding plays a role. “It’s important that you put teeth in your program. We try to keep our days in inventory at a pretty healthy number, so we may have nine to ten days in inventory.” Nonetheless, Zatina noted that the idea of having vendors help in offsetting the cost of incomplete orders or missed time windows was something he had not considered.

That idea, said Mr. Roach, did not come from Ben E. Keith, but from a manufacturer. “There are manufacturers out there who are willing to provide us with discounts, to some extent, if we will do certain things on the inbound side. There is one that if we have a scheduled delivery from that manufacturer at a particular time and we get that truck in and get it off, unloaded and gone within that window, then they provide us with a discount. It’s not really a minimal amount. If it’s a large enough manufacturer, it can amount to some sizable money. So we got the idea from them. They basically will incentivize you if you will do these things.”

Transportation Costs and the Role of Backhaul
With the highest cost of the logistics curve being transportation, Steve Potter queried panel members on how backhaul fits as a source of income, directing the question first to Tom Zatina of McLane Foodservice Distribution, where serving all chain business makes backhaul an important factor.

“We are very aggressive about backhaul. Obviously in our business, you want to make certain that you do not travel empty miles,” Mr. Zatina said. “To the extent to which you can be successful at that, it makes a big difference in your P&L.” Those backhaul opportunities include McLane’s sister company, a grocery business. “We’ve challenged our distribution center managers and they have responded nicely at getting creative about finding new opportunities to backhaul product.” To succeed in this area, Mr. Zatina said that distributors need to have someone dedicated to finding these opportunities.

Mr. Braverman added that it is necessary to get various departments to think as one about backhauling. Where one area of the business sees financial benefit, another area has to deal with unloading product so that trailers are ready for use. “What we have tried to do is teach everyone that they have an impact on the company’s health and the company’s bottom line and you do that through proper incentives and education so that everyone understands the need for backhaul and knows that it makes sense, and that they are all working together to help the company maintain its profitability,” he said.

The Future of Technology – What’s Next?
Mr. Potter’s final question concerned how panelists envision the use of technology over the next five years.

Mr. Roach replied that if there were one desire he could cite that will drive the next steps in technology, it would probably relate to the speed at which information moves across different business areas within a company, and certainly the speed at which information then travels between trading partners. “Usually what drives those quantum leaps in technology is the demand for information. We see it in our company. We’re all wired … but even today, it’s still not fast enough, we still want that information quicker.” The next great change, he said, might be using that information to predict what is going to happen tomorrow or next week.

Mr. Sullivan felt information flow was also where things will trend. “My example would be that as soon as we deliver to our customers, we’re uploading the data of that delivery right into their system, and that then updates their inventory. Or as soon as manufacturers deliver to our location, and we receive it and there is an error, then that information goes immediately to the manufacturer. Those are the types of things that we can see in RFID — the ability to know every single case, what happens to every single case, what temperature it was kept at throughout the supply chain, those types of information from the manufacturer all the way through the user are the types of things that we will be seeing.”

The trend is definitely towards wanting it faster and wanting to pay less, said Mr. Braverman. “I see our customers getting more involved in the order placement, order processing part.” When consumers today order something online, they want to be able to see where the product is every step of the way so they can anticipate when the delivery will be at the door. “I see the generation coming up wanting to do more and more of that and we need to make sure that we have the systems developed that will allow that.”

Mr. Zatina felt the ability to quickly track and react is important. “With technology, we are always looking at what we can do, in our business, to help us keep track of what is going on and react. And also what can we do to keep track of what’s going on with our customer — or even better help them track and react. Having the ability to react to customer needs will drive us into new technologies and make us even more indispensable as a business partner, in the things that we bring to the equation that makes it easier for them to run a restaurant.”

Mr. Potter closed the session by noting the resilience of the foodservice distribution industry. “It’s not the first time we’ve had problems,” he said. “We’ve come out of them better than we’ve come in. Success is truly doing a lot of little things right, and we are focusing on the little things right now. It’s a tribute to you and your companies that you are here today to look for answers,” he said.

For more coverage of the 2008 Foodservice Distribution Conference & Expo, see the 3rd Quarter IFDA Executive Update.