Working with Larger, More Demanding Customers

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1 Working with Larger, More Demanding Customers How Supplying Costco and Other Mass Merchandisers Can Impact the Business Processes of Food Companies

2 Table of Contents Introduction...1 Changes to Business Processes...1 Demand Planning & Sales Forecasting...1 Product Development & The Private Label Process...2 Sales Order Processing & Integrated EDI...2 Pricing Costs, Rebates & Quoting...2 Production Planning...3 Product Traceability and Recall...3 Order Fulfillment & Logistics Planning...3 ERP Ties Best Practices Together...4 About JustFoodERP...4

3 Introduction Working with mass merchandisers like Costco, Target, and Walmart is having a significant impact on how food processors and distributors run their businesses. With greater revenues increasingly coming from these giant retail customers, food companies need to find ways to ensure the greatest efficiencies and the lowest costs, without sacrificing quality control or food safety. Working with mass However, many food processors and distributors lack the right technology merchandisers like to achieve efficiencies that require tightened controls and improved visibility. Food companies may be relying on systems made up of a hodgepodge of Excel spreadsheets, Access databases and accounting packages Costco, Target, and Walmart is having a that do not have the functionality needed to achieve success in working with mass merchandisers such as Costco. significant impact on The shift towards larger customers offers advantages to food how food processors manufacturers and distributors increased revenue growth, larger sales and distributors run orders, stability in sales forecasting and production planning. However, working with Costco and the like can represent real risks to your business. their businesses. A drop in your vendor performance score by the mass merchandiser might see you replaced by your competitor. Additionally, as giant retail customers drive more efficiency across the supply chain, pressure for business process change management will be felt at your food company. CHANGES TO BUSINESS PROCESSES Working with Costco or other mass merchandisers may require changes to your internal business processes, for example: The sales order management process that your food company has developed to satisfy smaller regional customers will not meet the requirements of a retail giant. Expectations of shorter lead times will require more accurate demand planning and sales forecasting. These shortened lead times may also create a need to plan raw material requirements more accurately. The inevitability of private label product focus could also devalue your own brand recognition. Simultaneously, a private label product requirement creates a need for more stringent product development processes. DEMAND PLANNING & SALES FORECASTING Working with a Costco as your customer means having the highest of performance expectations placed upon you; on-time, on-quantity fulfillment metrics will make or break future orders. While production and logistics planning has an impact on those metrics, the root of success begins with accurate demand planning and sales forecasting. Without accurate sales forecasting, your production floor could run into capacity constraints or ingredient shortages. 1

4 PRODUCT DEVELOPMENT & THE PRIVATE LABEL PROCESS Product development is a key requirement when working with mass merchandisers. It is highly likely that these customers will demand a private label product. This means multiple iterations of recipe versions for both bill-of-materials (BOM) and machine routings. Many companies in high growth modes, or companies new to product development, may not have the discipline to accurately: 1. Capture recipe versions 2. Solicit measurable customer feedback, or 3. Track which versions made it to the customer for evaluation. Product development will also require more accuracy with sales quoting. Full knowledge of your exact costs for raw materials, labor, overhead and freight costing is critical to a profitable customer. A switch to private label product may also require a transition from make-to-stock to make-to-order manufacturing, with the resulting impact of production planning, manufacturing and packing. SALES ORDER PROCESSING & INTEGRATED EDI Electronic Data Interchange (EDI) is the prevailing method of transaction processing for mass merchandisers; if you are doing business with Costco today you have already made this technology investment. However, without the integration of EDI transaction into a business system, you are not getting the most out of this transaction. Receiving EDI orders (850 or 875), or order changes (860) would ideally flow through an automated process. Any orders that are off order rules should automatically be flagged. Common order rule infringements may include less than full-pallet orders. These infringements may contradict agreed terms and may impact pricing. Manually processing these orders may create an unwarranted delay in order production or order fulfillment. Some Costco suppliers also use advanced shipping notices (ASN 856) for product, or even ASNs specific to CHEP pallets. Taking an integrated approach to EDI order processing will reduce human error, accelerate production and fulfillment therefore, leading to improved performance. PRICING COSTS, REBATES & QUOTING The old CFO adage, a dollar saved in costs has the same impact on the bottom line as $10 in new revenue is increasingly relevant to food manufacturers supplying Costco. Price setting is not an option; price points are often communicated to manufacturers who then have to derive a maximum cost to Costco based on pre-defined gross margin percentages. As a portion of unit costs is fixed, every food manufacturer prefers high-volume orders. The mechanism to ensure high volume, long-term orders is to offer volume-based pricing 2

5 and rebate schemes. Supporting these advanced pricing programs and rebate offerings can become complex. They are based on perfect costing information, which is often a luxury for food manufacturers who can only account for average costs on bill-of-material items and do not have good visibility on labor, overhead, or freight costs attributed to a product. Rebate programs are difficult to manage using disjointed Excel spreadsheets and Access databases. Food companies often accept these inefficiencies as a price of doing business, when they are unnecessarily losing profitability as a result of inaccurate costing or inaccurate deduction accounting. PRODUCTION PLANNING Facing reduced delivery lead time expectations, manufacturers and distributors need to depend on sophisticated planning to ensure that raw material levels are sufficient to produce food product. For example, if Costco s lead time on delivery is 10 business days, but key raw materials or packaging lead times exceed 10 days, your purchasing department needs to adequately plan for purchases. Concepts of minimum/maximum levels, safety stocks, and Economic Order Quantities (EOQ) will often result in overcompensated inventory levels, or worse, depleted inventory levels that prevent production. With private label products, your production environment may be forced into a make-to-order scenario. This could require a new approach to scheduling. Resource utilization will become critical to order profitability. Visibility on available capacity or capacity constraints will allow you to reduce changeovers, or reprioritize production orders. Your company can easily and accurately satisfy all recall requests by having a disciplined approach to raw material receiving, staging for production, and finished goods lot tracking. PRODUCT TRACEABILITY AND RECALL In addition to FDA requirements for product traceability and recall, mass merchandisers have even more stringent expectations for traceability and recall processes. Conducting mock recalls are often part of the normal course of doing business with Costco. Fulfilling on a two or four hour recall response may force your company to perform a wider recall than necessary, pulling product needlessly. Your company can easily and accurately satisfy all recall requests by having a disciplined approach to raw material receiving, staging for production, and finished goods lot tracking. ORDER FULFILLMENT & LOGISTICS PLANNING With increasing costs associated to freight, your warehouse and shipping processes demand extra attention. Planning for full trucks is simple enough; however, most food processors depend on combining multiple orders into a single shipment. Accurately accounting for freight costs based on pallet count, weight or cubage can be time consuming or grossly inaccurate, thereby skewing costs. The paperwork required to generate multiple order shipments can result in late docking and penalties. 3

6 ERP TIES BEST PRACTICES TOGETHER An enterprise resource planning (ERP) system can help your food company attain each of the best practices outlined in this white paper keeping your costs in line as mass merchandisers put pressure on your existing business processes or force you to adopt new processes. An integrated ERP system will manage every aspect of your business from product development, costing and quoting, sales order processing, inventory controls, production, fulfillment, and finance ensuring that every asset in your business is utilized to the fullest. As there are many ERP vendors on the market, be sure you choose software that has been designed with food industry-specific processes and functionality, and select an ERP implementation partner with extensive experience in helping food companies with business process change management to suit their needs as a supplier to mass merchandisers. ABOUT JUSTFOODERP JustFoodERP delivers software to help food processors and food distributors lower inventory costs and improve food safety. We have built a product that takes you where you want to grow, as quickly as your appetite demands. We do this with the latest Microsoft technologies available. 4

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