Franklin Foodservice Solutions

In 1960, Bob "R.T." Tracy began distributing milk powder from Mt. Sterling, IL to Midwestern dairies, recognizing that "they preferred frequent deliveries and often ran short of warehouse space." By bridging the gap between manufacturers who favored truckload shipments and customers who needed turns, Tracy was forging a powerful link in the food logistics chain, which would become known as redistribution. Over the past 40 years Dot Foods and other companies have steadily built on this foundation, and redistributors now offer a wide range of sales, marketing, and logistics services to manufacturers and distributors throughout the industry.

Redistribution has evolved to the point that most foodservice-channel manufacturers and distributors recognize its value. The majority of foodservice distributors, both large and small, purchase from redistributors; nearly every major manufacturer has likewise taken advantage of the benefits offered by redistributors. As a result, the foodservice volume handled by redistributors has grown at a pace that far outstrips the industry, and managers in other food industry channels are beginning to take notice.

While Dot Foods is the clear leader in food redistribution, with national service across all temperature classes, other companies offer redistribution services by focusing on limited product lines and/or geography. These include Empire Beef, Foodservice Center, Honor Foods, and Don Greene Provision. There are also many foodservice distributors who "dabble" in shipments to other distributors, without offering sales reporting and other services provided by the major redistributors.

Significantly, Sysco has made a major commitment to building their own redistribution capability over the next few years. The Sysco network will feature a system of Regional DC’s designed to handle all of the LTL volume that flows from manufacturers to the local Sysco branches.

Successful redistributors have grown because they are uniquely positioned to provide great value to both manufacturers and distributors.

To the food manufacturer, a sound redistribution strategy will yield:

• outsourced management of small, high cost-to-serve customer orders
• access to additional "unknown" customers
• reduced credit risk
• simplified logistics
• additional sales support
• accelerated sampling response

The problems solved by redistribution are not unique to the foodservice "street" channel. Food manufacturers and redistributors are beginning to develop creative approaches to Systems Distributors, Bakery/Deli specialists, Vending, and C-store distributors. As a result, a new crop of Sales, Marketing, Finance, and Supply Chain people are working to figure out how redistribution fits into their strategies.

For manufacturers, key considerations revolve around which customers to steer toward redi service, which products to offer through redi, and the financial ramifications of a redistribution program.

Distributors who struggle to meet minimum order weights, or who submit small and infrequent orders, are obvious candidates for service through redistribution.

Those who buy in Truckload quantities clearly are not. Most manufacturers consider distributors who average less than ½ Truckload per order as potential redi candidates, although as we shall see, the economics of filling the smallest orders is quite different from the economics for the larger orders. Influencing customers to buy (or not buy) from redistributors requires a combination of disciplined pricing practices, healthy working relationships between the manufacturer and redistributor, and Sales Force buy-in to the redistribution strategy.

The question of which products to offer through redistribution likewise bears careful consideration. In general, a manufacturer’s product choice will be driven by the distributors he serves through redistribution. The system works best for all parties when a distributor is able to source a given manufacturer’s entire line via redistribution, as opposed to splitting orders between a redistributor and direct service.

This becomes problematic for some manufacturers when it comes to private label, custom packed and special-priced products. We often hear statements like "our margins are too thin on those products to put them through redistribution." While this is an understandable concern, we usually counter with "your costs don’t care what label’s on the box, or what price is on the invoice." This is why a thorough understanding of "redi economics" is crucial to developing a successful redistribution strategy.

"Redi Economics" for the manufacturer starts with analysis of Cost Avoidance for redi vs. direct service, and proceeds through Marketing Value and Revenue Impact.

When existing business is switched from direct to redi service, a manufacturer has the potential to reduce both hard logistics costs, and softer order management costs. The hard savings are in customer freight, and may also include deployment and warehousing costs if the redistributor is able to pick up at a manufacturing plant. The challenge for manufacturers is to quantify these costs for the specific set of customers who are redi candidates. Looking at averages or company "rules of thumb" is inadequate, because small-order customers drive higher costs throughout the supply chain. These hidden cost drivers include a higher frequency of hand-picking, excessive stop charges, and reduced trailer utilization.

The Order Management cost offsets are more difficult to quantify, but doing the work is often an eye-opening experience. Order Management costs include all of the activity from receiving and entering orders through booking loads to extending credit, billing, and collecting. When the "percent of orders" is compared to the "percent of volume," manufacturers begin to see that they are often "laboring like an elephant to give birth to a mouse!"

Some argue that even if all small-order customers are outsourced to redistributors, there is no Order Management cost reduction without a headcount reduction. This argument reflects the fact that current accounting systems and practices are incapable of reflecting the cost of order management, and therefore the savings when order management activity is reduced.

In fact, this issue is responsible for the occasional "bum rap" given to redistribution programs by some manufacturers. The redi allowance is clear and quantifiable, while the savings are often fuzzy and buried in overhead allocations.

Even without clearly documented cost savings, however, wise manufacturers will redeploy their order management resources when they move a significant amount of activity to redistributors. While the cost reduction is not explicit on the P&L, there is no doubt that money is saved when order management activity is reduced.

Another consideration is the "Marketing Value" of having your products available through redistributors. There is no question that distributors value having a manufacturer’s product "within arm’s reach" and available on a weekly basis with no minimums and short lead times. It is also likely that fill rates and service levels will be higher through a good redistributor than with direct service. As always, the challenge for the manufacturer is converting "happier distributors" into "more business" in order to benefit from this marketing value.

Perhaps of greater interest to manufacturers is the opportunity to penetrate new distributors that would not be available through direct service. Redistributors serve a wide range of accounts that are "hard to reach" via traditional supply chains. These include not only small distributors who lack the volume or space to meet order minimums, but various jobbers, segment specialists and non-mainstream distributors who are often unknown even to the local brokers. Access to this new universe is certainly worth a few margin points.

The final piece of the redistribution puzzle for manufacturers is an understanding of the Revenue Impact of moving volume through redis. Manufacturers who enforce strict bracket pricing will need to account for revenue slippage when a redistributor buys at FOB plant prices to serve existing business that was billed at the highest delivered price bracket. Special prices, bids, and trade deals all take on an added level of complexity when they are managed through redistribution. And the redistributor’s pricing practices relative to the manufacturer’s price list must be clearly understood in order to develop an effective program.

"The distributor’s bread and butter is demand replenishment," says Merrifield. "Starting with his operator customer’s demands, he must constantly find ways to provide one-stop shopping, a high fill rate, and access to unique, low-volume items. By providing weekly service on a wide range of product lines, redistributors can provide measurable improvement in many key areas."

Bruce cites reduction in inventory cost as an obvious benefit. He adds that distributors usually also show improvement in fill rate, average payload per stop, and customer satisfaction when they use redistribution strategically.

In a recent study of redistribution in the industrial bearings industry, Bruce found that "the average cost of order entry has dropped from over $5.00 per line to less than $.30 (again, a difficult-to-measure "hidden benefit.") One distributor customer reported "inventory investment reductions of 25% with significant increases in fill rates, because stock inventory can be replenished and re-tuned weekly." Distributors have further found that "dramatic improvements in the lead times for special orders have saved old business and won new orders." Certainly food distributors who use redistribution are realizing these benefits as well.

We are believers in the value of redistribution. Successful programs are based on a solid understanding of the principles outlined above, development of a sound strategy, and persistent implementation.

When addressed in a "halfway" manner, redistribution programs are subject to risks and challenges which can undermine their value. Below are some pitfalls to be avoided:

For manufacturers, failure to truly understand costs and cost offsets can make redistribution look like a bad decision (or worse, can drive a truly bad decision).

Occasionally, manufacturers get heartburn when the "wrong" distributors migrate to redi service. It can happen that a large, low cost-to-serve distributor elects to add a manufacturer’s line to his redi order, creating a delicate situation if the manufacturer has to incur added cost. These situations are easier to prevent than to reverse, so a shared understanding of the target market is essential.

Other manufacturer concerns include the "eggs in one basket" syndrome, where they fear giving up control of their business to a third party. This fear is worsened if salespeople and brokers are allowed to fall into an "out of sight, out of mind" attitude toward the distributors who buy through redis. It is incumbent on manufacturers to maintain close business-building relationships with distributors, even when the order fulfillment role is filled by a redistributor.

Finally, some manufacturers make the mistake of accounting for redi allowances as a "trade expense." This practice fails to recognize the cost savings realized in the supply chain. Charging a proportional amount of the allowance to the Supply Chain group not only provides a more accurate reflection of the business, but also ensures that Supply Chain people are involved in program development as well as ongoing optimization of the redi program.

Given the business benefits they offer manufacturers and distributors, it is little wonder that redistributors have experienced rapid growth, and the prospects for continued growth are excellent.

Smart manufacturers and distributors are putting together a redistribution strategy which addresses all of the above issues, and are thinking well beyond the foodservice "street" channel as they seek to improve results. A sound program based on well-understood cost savings and marketing value is the start. Diligent management of the redi channel is also necessary to maximize return on investment. Food manufacturers and distributors who excel at both will continue to reap all of the potential benefits of redistribution.