Grocers concentrate on sales, purchase distribution expertise

To read or listen to some business commentary, outsourcing from major corporations portends the end of good jobs and business responsibility in America. If, however, outsourcing leads to corporate doom, it is happening at a glacial pace. More and more companies are outsourcing to contractors who provide better service at a lower cost. In many instances, workers move from in-house jobs to positions at the contractors.

Outsourcing has a long history among wholesale grocers and supermarket chains. These businesses have outsourced parts of their operations for years. For instance, A & P, as long ago as the early 1970s, used dedicated contract carriers to deliver orders to its stores from company distribution centers. Kroger also has used contract distribution for years. One of its larger contract carriers in the South and Southeast is Quickway Carriers of Nashville, Tennessee.

In recent years, Albertson's expanded the dedicated distribution concept by using two contractors at one facility. The supermarket operator from Boise, Idaho, built a new distribution center in Katy, Texas, to serve stores in Houston and along the Gulf Coast. It installed two dedicated carriers: Knight Transportation of Phoenix, Arizona, and Dick Simon Trucking of Salt Lake City. At the time, the Albertson's contract was Knight's only refrigerated operation. After failing to gain a foothold against strong competition from Kroger and Randall's (now wholly owned by Safeway) in the Houston market, Albertson's pulled out of the southeastern Texas market and closed the distribution center.

Contractors operate warehouses

As the cost of labor escalated through the 1980s, a number of food distributors took the next logical step. They built a business model around owning stores, distribution centers, and inventory. The labor-intensive process of operating the distribution centers and moving goods to stores was turned over to third party service providers who concentrated on lean operations that cut the logistics costs for retailers. This model is now well entrenched among wholesalers and supermarket chains. Some analysts suggest that the next step along this road to logistical streamlining will be for vendors to consign inventory to wholesalers and retailers with title passing to the distributor at the point of sale. For a wholesale grocer, the sale point is the back door of a store at delivery. For a supermarket, title might not pass until the product is scanned at the front-end checkout counter.

Supermarket operators such as the Overwaitea Food Group in Langley, British Columbia, can be seen as prime examples of this business plan. The company uses separate contractors to operate its warehouses and deliver orders to stores, saying that the obvious benefit is stable budgeting based on a fixed cost per month for warehousing and transportation. Such an operation is designed to be completely invisible to consumers, based on the assumption that the public doesn't care how goods get to the store as long as the products meet price and quality expectations.

A number of companies are working to make the third party logistics model fit into grocery distribution tighter than ever. For instance, Wal-Mart, in the past few years, has exploded into the largest grocery retailer in the country. Although Wal-Mart owns and operates a private fleet to supply its discount stores, the company does not deliver groceries, especially not perishables. The entire grocery delivery operation at Wal-Mart is handled by third party contractors. Among the contractors are Crete Carriers, Merit Distribution, Schneider National, Swift Transportation, and Werner Enterprises.

Huge dedicated fleet

None of the parties to Wal-Mart's grocery distribution program, not Wal-Mart nor its carriers, will comment in detail about the arrangements between them. However, all the carriers involved operate equipment designed specifically to Wal-Mart specifications. All the trailers in the fleets dedicated to grocery distribution are the same, because Wal-Mart is reported to conduct an annual business review to decide if contractor operations should continue or if the company should take over its own grocery distribution. If distribution were to be pulled into the Wal-Mart private fleet, the standard specifications would prevent the company from having to operate mismatched equipment. The fleet dedicated to delivering Wal-Mart groceries may total as many as 5,000 refrigerated trailers.

Some details are available. For instance, Swift Transportation acknowledges that Wal-Mart is its largest customer. That relationship grew in 2003 when Swift purchased Merit Distribution from the McLane Companies. McLane is a convenience store distributor that was a Wal-Mart subsidiary until 2003, when it was sold to Berkshire Hathaway. At the time of the two sales, Merit was an internal contractor and for-hire carrier primarily dedicated to Wal-Mart and McLane. Wal-Mart had purchased McLane from Drayton McLane, now owner of the Houston Astros baseball team. The sale of McLane came about as Wal-Mart decided to concentrate on its core retail business and exit the convenience store wholesale grocery market.

Some of the greatest detail available about a Wal-Mart grocery distribution center concerns the facility that opened in North Platte, Nebraska, in June 2003. North Platte is roughly half way between Lincoln, Nebraska, and Denver. The warehouse serves Wal-Mart supercenters within a 250-mile radius. When operations began, the fleet consisted of 80 tractors provided by Crete Carriers in Lincoln. Those 80 tractors were projected to rise to 130 in a short time. The dedicated Crete fleet uses tractors in Crete colors pulling three-compartment, multi-temp refrigerated trailers that carry Wal-Mart markings.

Aggressive third party contractor

One of the more aggressive carriers in the third party logistics business is Total Logistic Control in Zeeland, Michigan. It is a subsidiary of a holding company formerly known as C2; the corporate name was recently changed to Total Logistics Inc to reflect the company's primary business more accurately. TLC began as a warehousing company in nearby Holland, Michigan, and added trucking as one of its services. At first, services concentrated on regional activity in the central Midwest. For instance, TLC began a relationship with Meijer Stores in Grand Rapids in 1985. That contract called for TLC to provide warehousing and dedicated transportation for Dean Foods ice cream to 126 Meijer supermarkets and 78 Meijer convenience stores. The dedicated ice cream warehouse is in Paw Paw, Michigan. More recently, TLC has agreed to provide dedicated distribution for general merchandise, perishables, and frozen foods from Meijer's Michigan Distribution Center in Lansing, Michigan to stores in Illinois and Indiana. The contract began with 35 tractors and 95 trailers in the dedicated fleet. Each of the stores on the program gets 25 to 30 deliveries a week.

In a related development, TLC recently expanded its national logistics network from its dedicated distribution center in Rochelle, Illinois. The 349,000 sq ft facility is 90 miles west of Chicago and serves as a holding and distribution center for manufacturers serving the wholesale grocery, supermarket chain, and foodservice markets. Some of the customers served from the 14.1 million cubic ft facility include Jewel-Osco, the Midwestern division of Albertson's; Dominick's supermarket chain in the Chicago area, a division of Safeway; and Roundy's, a wholesale grocer and retail chain operator in Wisconsin.

Fortune 100 Company

Within the past year, TLC has expanded its dedicated logistics operations outside its midwestern base by agreeing to operate two dedicated distribution centers in Ontario, California. The two facilities serve a large client identified only as a Fortune 100 food company. Together, the two distribution centers total 685,000 sq ft and distribute dry groceries and refrigerated products throughout southern California.

Not every wholesaler or retailer follows a third party logistics plan. For instance, when Safeway opened its largest distribution center in Tracy, California, warehouse operation and distribution was handled by a group called Summit Logistics. Summit's 1,500 employees were members of the Teamsters union. In 2000, these workers went on strike for seven weeks to protest strict work rules imposed by Summit. Since that time, Safeway has decided to resume control of warehouse and distribution operations at Tracy. However, three of Safeway's 15 distribution centers are operated by third party logistics providers.

Whether warehousing and distribution is handled in-house or by a third party, it is an amazing process. “Physical distribution of groceries in the United States is a marvel of logistics,” says John Deighton, professor of marketing and the Harold M Brierley professor of business administration at the Harvard Business School. “It is amazingly efficient and it allows supermarkets to run making a dollar of profit for every hundred dollars of revenue.”

TAGS: Foodservice
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