NASH FINCH COMPANY

Nash Finch is a large, $20 billion wholesaler of groceries, also with retail stores, in the southeast and midwest of the US.

Our first encounter was in the 1970s, when, the VP of Distribution responded to a mailing about a seminar on Distribution efficiency and attended one that we were running in Los Angeles with his chief financial officer.  They liked the seminar and soon retained us to design a prototype distribution center, which they constructed in St. Cloud, MN.  They subsequently built two other distribution centers with the same design.

After that we talked from time to time, but they had no needs for our assistance, although they were quite pleased with our distribution centers.

I would comment that our design called for a taller than normal building at 32' clear working height, with separate perishable and dry wings with an office over the loading docks where they did not need the full height in the warehouse.  The layout called for the fastest items to go in the front and closest to the center of the combined warehouse to minimize the travel distance and facilitate loading of the dry and perishables on the same truck.

Probably 10 – 15 years passed.  Then the executive VP responded to a mailing about item handling costs and item profitability.  We visited and reached an agreement to work in that area.

We convinced them that they did not simply want a one time study but rather on going information that would be actionable.  So we worked on a system that would do this, and they formed a task force that would work with us.

We delivered the system and profit information and even expanded it to the customer profit level.  There were lots of issues raised but we all too quickly learned that they were unwilling to say no to almost any request from a customer; thus they wouldn't really jump on the information and use it to make change.

Then a tragic traffic accident in front of the offices killed the Chairman and CEO. The executive VP was immediately promoted to President and CEO.  Two projects with us were launched by him, a study of buying efficiency and inventory management and later the oversight of the IT function.

The outcome of the buying and inventory management study led to a proposal that they centralize the stock of slow moving items, marrying the slow moving order from the central warehouse with the order of fast moving items from the customer's assigned warehouse.  The study also validated their idea to close a centrally located but redundant warehouse.  They accepted the proposition of centralized slow movers and proceeded to  plan for it.

So we built them a simulator that would analyze item and vendor movement and make recommendations for what to centralize.  This worked and soon a centralization program, albeit conservative, was in place and growing.

The IT oversight put us in the middle of their millennium preparation.  They had formed a task force to determine what to do.  They didn't really like their evolved heritage systems and began to listen to presentations from suppliers of integrated systems such as People Soft and SAP.  They had decided to go to SAP as the integrated system that would meet the greatest number of their systems requirements.

In retrospect, they had a flawed way of looking at requirements, as they would list a desired feature or functionality without saying how it should operate or whatever were the major constraints.

They had been given some very general presentations by SAP which they mostly liked.  They had determined that the warehouse management sub system from SAP was inadequate, but otherwise no issues.  They were not concerned that there were no grocery wholesaling installations and only an installation in process for a specialty retailer with far lower physical volumes.

I was assigned to the project just as they were preparing to sign a contract with SAP.  I objected strongly to signing without a detailed understanding of the functionality that they would get.  They signed despite my objections.  The CEO implored me to stay with them despite my concerns which I agreed to do.

Signing was followed by several weeks of presentations by SAP people to a large group of NF people from both IT and operations.  My sense of the presentations was that the SAP people were more concerned with describing the sub systems and showing how they fit together, rather than how they worked vis a vis the business functions of a company.  Some new issues did surface, but I do not recall show stoppers except that the buying system capability was judged unacceptable.  SAP agreed to create an appropriate new module for them.

Next was attendance at a training program where the emphasis was on a system of screens to load and run the system.  My sense was that the s screens were very slow with no capability to load or update, say, all of the items from one vendor for specific data elements like case sizes or promotions.  I explained my deep reservations at that point, but the NF people were hoping for the best and did not hesitate.

The actual installation required more assistance than SAP ever would provide and NF was told to hire a consultant.  They did and the installation started with a huge team of NF people and a significant team of consultants.  We noted that the consultants did not always have answers.

Our role was now minor with the SAP project, and the CEO and executive VP decided that we would make a new push on customer profitability.  We actually installed eight Midwest warehouses and were getting some follow through on abusive customer ordering, including customer cherry picking of low cost unprofitable items, and the cost of poor NF customer service.  An example of the latter would be that the promotional product was not available when required to be on a specific customer's delivery so it needed to be specially delivered at an additional cost.  We also got some pricing installed whereas a willing customer would pay a higher, more realistic price for delivery in return for a discount otherwise.

In the meantime lots of things were happening.  SAP was going poorly.  To illustrate how poorly, consider just one of the problems.  They were doing a test of the order processing and shipping system to process a day of orders.  It took some 30 hours to finish, where the existing system took 6 hours which is almost the most that it can take and get the other jobs done and maintain the shipping lead times to the customers.

We made a buying system presentation of a system functionally better than anything they had or were looking at.  They rejected it out of hand saying it was not a part of a bigger system.

NF bought a wholesaler in Dayton Ohio and its three regional warehouses.  They ended up closing one warehouse and never really integrated this new operation with the existing business to our knowledge.

They also bought Associated Foods of Omaha and closed a nearby smaller warehouse.  They had a really difficult time getting the warehouse up to speed, with a loss of customers  and profit.

We prepared a proposal at the CEO's request for cost of service based pricing for a dis-satisfied customer.  All of us involved, NF people included, liked it.  At the last minute the CEO decided not to present it as he thought the customer was too dis-satisfied to listen.  Sad.

About this time the CEO resigned in order to retire.

A new CEO, arrived almost immediately.  He was the former CFO of an East Coast food distributor.

He quickly took action as he saw fit.  He canceled the SAP installation and decided to make necessary changes to existing systems to handle the millennium.  He fired the senior IT people.  He put us on an orderly phase-out program.  He closed several marginally profitable branch warehouses and fired the HQ team that had been overseeing the branch warehouse operations as well as some warehouse managers.

Needless to say, profits suffered initially, but after a year or so things got better and NF stock made new highs.  Subsequently NF had new troubles with failed retail operations and difficulties for making a wholesale profit.  But they got past that and are still in business with a respectable stock price.

Morals abound!

During our term management was quick to see new ideas but very slow to follow up.  They purchased state of the art tools from us but didn't put them to effective use.  There were lots of slip ups with pricing and handling customers and management was not on top of this.  They were not of a mind to look in detail at a branch warehouse operation and correct what was wrong.

Many businesses have gotten in trouble over these things. 

KENTUCKY WHOLESALE GROCERY

Kentucky Grocery is a regional wholesaler of groceries based in Kentucky.

The president of KG responded in 1994 to a mailing about customer profitability.  We met him at an industry meeting and subsequently reached an agreement to make a paid visit to investigate opportunities for them to improve their operations and customer profitability, which happened early in 1995.

The opportunity for improving customer profitability was real enough.  They have customers ranging from convenience store owners to small supermarkets and a few medium supermarkets.  Order size varied greatly as did the product mix taken by the customer.  Delivery costs also varied greatly.  And pricing to a given customer was not reflective of the costs to serve that customer.

But really struck us was that this company had a very crude system of reordering and inventory management.  Essentially the buyers were deciding what to order manually based on simple averages kept by the computer.  For people that are in the grocery industry, you will understand that there may be 400 suppliers and 15000 packaged items not including fresh meat and produce.  A truckload of incoming merchandise may have 10 to 200 items and which items you order is all important.  And then there is the issue that there are certain items that you must have and other items you order to fill up the truck.  Because of  KG being a medium sized wholesaler, it has opportunities to sharply reduce the purchase cost and holding costs of the product that it sells by carefully selecting the minimum purchase quantity for the vendor and carefully building up an order based on the need date of each successive pallet taken.  If you do this with a computer and the correct data, costs will be lower than with a manual process.

We mentioned this to the President, who also was struck by the point; we mentioned our own developments in this area with our clients in the US and Europe, and he told us to proceed with a buying system installation.

There was a major obstacle, however.  The Head Buyer was a reasonably savvy woman with experience with another system at another wholesaler, and had made a retrenchment to a simpler system at KG.  She could accept intellectually that a computer could calculate a better order, but she really did not want to change from her present, simple system.

The President told her to go ahead anyway.  She agreed, subject to examining our system and having changes made to suit her.  So we started making changes and installed the system in six months.  Initially most of the changes involved screens and buyer functionality to create orders manually from last minute data or to modify a computer generated order in the easiest possible way.

Once the system started to produce recommended orders she took a stance that the orders were to be perfect if the system were to be used so we embarked on a set of detailed investigations and changes to the order generation logic,  while all the time she was refusing to manually adjust and place the generated orders.  Our prior client experience was that the clients were happy with a 90-95% correct order and would take care of the adjustment themselves, not wanting to complicate the system.

This process went on for a year at least.  Finally the President threw up his hands and said that we and the Head Buyer should come up with a list of issues and that we should deal with that list gratis except for expenses.  And we did in about 8 months.

 

About this time the Head Buyer resigned, citing the pending system as unworkable and ruining her life.  The Assistant Head Buyer now promoted, had less experience but was interested in making the system work.  So in 1997 and 1998 we dealt with one vendor at a time and cut over to using the system's recommendations for that vendor.  We reached the level that 95+% of the vendors worked well.  And with the new head buyer’s vision we actually solved their seasonal forecasting problem in a clever way

 

At this point the former President, now Chairman, really wanted to deal with customer profitability.  We installed a system, developed with another wholesaler, that measured customer profit on each delivery and kept a data base so that it could be looked at long term.  It produced reasonable initial output.

 

However, there were small problems with the output that would have required them to debug the data.  They did not have the patience to either to do this or complete the required data collection.  So it languished after initially illustrating that KG had the usual problems of small deliveries, products being sold below cost and customer cherry picking between the offerings of two wholesalers.

 

The buying system was going reasonably well.  We had really accomplished a lot.  A very practical seasonal forecasting system, a sophisticated purchase lot tracking system, logic that helped them meet vendor ordering rules for much bigger discounts and more.  But this time the new President was under a lot of self-imposed pressure to increase profits.  He chose to do this by traditional means of customer service, buying out of channel 'diverted' product, greater customer service and reduced expenses.

 

Reduced expenses meant, among other things, less buyers, less training and less consulting.  The system chugged on without a push for data accuracy and 100% acceptance of recommendations.  Also the new head buyer, the system champion, left the company and was not replaced.

 

So the system became more of an order entry system and less of an order recommendation system.

 

At the same time KG was installing an integrated system of warehouse and sales management.  It included an integrated reordering system with less capabilities than our and which was less demanding of the buyers.

 

The assignment ended amicably enough in 2003 when the Chairman told us that the president and his operations team had decided that they didn't want to put any more time or energy into the buying system that we had installed and that they would proceed with implementing the less demanding integrated system.

 

It is our sense that what happened at KG was almost inevitable.

 

At a most basic level, once a system loses its owner or if it never had one, it is only a matter of time until it is doomed.

 

Companies like KG are squeezed on costs and cannot afford highly educated professionals.

 

At the same time the buying problem is getting simpler to do a so-so job:

 

The assortment being offered at retail is shrinking so that some of the hard to buy items are no longer sold.

 

The suppliers are taking a more active role in monitoring their inventory in sales outlets. 

 

The retail game is increasingly shifting to promotions and rebates, which a retailer or distributor must get to stay alive; which is a very different emphasis than the earlier one of an orderly flow of goods, high service levels and a big assortment for the customer.

 

Wholesalers are an endangered species in most industries and especially in retail food.  At this writing there is only one national wholesaler, Super Valu, and 20 – 30 regional wholesalers.  Independent retailers do not have much of a choice any more.  Yet the marginal chain stores are closing or becoming independent stores.  So there are now independents with less choices who are taking what they can get in wholesale service and even evolving to limited assortment and food service.

 

Not a good environment for a small to medium sized wholesaler to take a sophisticated, analytical approach to operations, perhaps.  And KG is staying alive in this environment!

 

 

WHOLESALER H

Wholesaler H is a medium sized wholesaler of fruits and vegetables in the upper Midwest.  We were doing a study on produce efficiencies in 1997 for FFoods that led us to meet Phil, President of Wholesaler H, to get his view of FFoods.  At the same time I was able to discuss opportunities to assist his company.  However, nothing materialized at the time, but we stayed in touch.

Finally in the summer of 1999 Wholesaler  H people were thinking of either expanding their facility or moving and we were engaged to help them decide.

Like many assignments, this one did not proceed in a straight line.  But more on that later.

Our first tasks were to understand what they were trying to do and project what types of additional capacity would help them the most.  They were interested in costs per unit to handle their products and the cost of servicing their customers.  We spent considerable time documenting this.  They were interested, but it didn't provoke them to change, as what we perceived as possible inefficiencies they perceived as their strengths.  Their product guarantee and liberal return policy might be an example of this.

As we began to understand their business the following points came to life.

--a firm of 150 employees, with sales in the $200 million per year range

--one major customer with 40 stores that accounted for 2/3 of the business

--another 100 individual supermarkets or small chains that bought smaller amounts per store

--extremely quality oriented with extensive programs to prevent quality issues and deal with them after some inevitably happened

--a physical plant that was very limited in physical slots for pallets of products and order assembly space and truck loading doors.  Thanks to this they had “work arounds” to deal with their limitations.  For example, they could force their system to receive loads of incoming product based on what they had ordered so that they would have inventory to pick as soon as the truck arrived, of course creating inventory errors at the same time.

--a union operation where the workers were to take a lot of responsibility for the slotting of product and the organizing of the daily operations.

Immediately the decision making focused on whether to expand what they had or to move.  Since the expansion had big costs and limitations, both expansion and moving were simultaneously investigated.

In the meantime we helped them with pricing for customers and for new business.  We also designed measurements of efficiency.  To our knowledge they were not implemented beyond testing.  Our feeling was that they did not have the patience to debug the models, despite their understanding of the concepts offered and their appetite for the information.

After considerable searching for a place to move, a site did turn up that they could use with some fitting and remodeling.  It was a former telephone company warehouse made available by the consolidations of deregulation and sell off by a major telecom organization.  The site, once fitted to their operation promised to lower their cost of operation and support many years of growth.  So in a brave moment they decided to go forward with the new site.  Needless to say, relying on a single major customer and increasing debt to finance the fitting up carries a risk.

We did a computer simulation for them and offered a layout and operating concept that was accepted by the workers.  We also helped them buy racking and deal with local officials concerning noise, fueling and other points of concern.

The architectural and construction people did an excellent job and Wholesaler H got a beautiful and efficient facility.  Moving in was well planned and executed.

Shortly after moving they had a lawsuit from a competitor concerning an employee providing copies of its sales flyers to the major customer.  It wasn't explicitly illegal and Wholesaler H had no direct role in the distribution or any use of the information from the flyers. Nonetheless the competitor presented an outrageous statement of damages that got everybody's  interest.  We helped Wholesaler H understand how outrageous but yet how serious this was.  No one wanted a trial and after a few months Wholesaler H, the major customer and the competitor settled.

And shortly after the lawsuit was settled the major customer was sold by its owners, which resulted in a brief closure of the stores for redecorating and re-pricing, which was a temporary cessation for Wholesaler H.  Then reduced number of stores reopened still buying from Wholesaler H.

At last contact, Wholesaler H was alive and recovering by selling more items to fewer customers.

This is a classic situation of a smaller business making its way.  They had very strong local operation, probably not one that could be replicated in multiple cities.  They had a beautiful way of dealing with unions and other employees.  Management was spread very thinly.  There was an interest in sophisticated information and systems but insufficient depth of staff and management to see it through.  The one customer situation was an obvious risk but a risk that they had to live with.

To their credit they used our professional assistance very well.

BLOOMING PRAIRIE COOPERATIVE FOOD DISTRIBUTORS

Blooming Prairie was a 100+ million sales per year Natural Foods Cooperative
Distributor with warehouses in Iowa and Minnesota.  We helped them in the mid 1990s.

We got a recommendation to them from a co-op board member, formerly a National Cooperative bank officer, and now an investment banker related to food.  We spoke on the phone a few times and then we agreed to a visit.  We learned that they served three business segments: small health food chain and independent stores, consumer buying cooperatives that pool orders and take delivery in a parking lot and supermarkets having specialty health foods sections.

There were lots of non-mainstream people mostly dressed in Jeans.

The question on their minds was how much more warehouse space did they need in each location.  They were aware of the opportunity to split purchases between the locations and would consider other synergies to reduce costs.

A tour of the facility was sobering.  Space was very tight.  Some aisles were only for walking.  Inventory was every place.  Questioning brought forth the fact that they were in a growing part of the food industry with far fewer competitors and where efficiency was far less important than simply having the merchandise.  There were also many promotions where the supporting stock was clogging the warehouse.

A review of the systems to support buying, customer ordering and shipping revealed that their systems were at best very crude.  And when we asked about data availability we were told that we could have an item list with year to date movement,  dollar cost and case cube.  They could give us weekly sales, cases and cubic feet moved by department as well.

Such data was not enough to feed our usual analytical process.  Also, they were adamant about a modest, fixed cost project.  We obliged.

Our approach was to work with groups of items, in this case 25 sub-departments.  We made assumptions on sales, stock keeping units, case cube and case volume growth, and inventory turnover.  We assumed a small amount of inventory sharing between locations and so created a year by year projection of sales, skus case cube and case volume by sub department for 5 years. 

They were pleased and after challenging our assumptions in vain they paid the final bill from us and used the report for their planning.

Subsequently we had several 1 – 2 day assignments to evaluate proposed new locations in the Minneapolis area.  They correctly decided to replace the Minneapolis general manager and we helped them find an ex-Nash Finch manager to fill that role.

They were also captivated by the buying concepts of order points, economic order quantities and adding items to a supplier's order based on projected need date for the additional merchandise.  We had many discussions regarding a future assignment to do this.

The relationship ended somewhat abruptly when the CEO told me that they were being bought by a large distributor, United Natural Foods.  The CEO wistfully said that they were a very down to earth company, no doubt with similar problems to those of Blooming Prairie; that we would probably hear from them.

Probably the only solution to a company like Blooming Prairie was to be bought, as they were very far from being competitive in a mainstream distribution environment.  It appeared that they could not afford to pay for or have the mindset to adequately deal with a move to modern systems and business practices.

To their credit, they only wanted information from us that they thought they could deal with.