Food Companies Leveraging Technology to Drive Down Logistics Costs

Food companies have carved considerable waste out of their supply chain costs, but plenty of continuous improvement opportunities remain.

By Kevin T. Higgins, Managing Editor

The ad tagline, “You’ve come a long way, baby,” was created for a women’s cigarette, but it’s just as applicable to the logistics of food and beverage transportation.

Supply chain logistics was a back-burner concern for food manufacturers in the 20th century. Production was where companies concentrated time and capital, and today’s finely tuned lines are testaments to the success of those efforts.

As management cast its gaze for the next target, logistics waste stood out as a fat target for cost savings. As recently as 2003, one-quarter of food transport trucks on the road were empty, estimated KPMG. General Mills Co. believed it could save $1 billion over the ensuing decade simply by collaborating with other food companies to fill trailers on the back haul. The cereal giant even entered discussions with competitor Kellogg Co. to piggyback grocery store deliveries, before cultural and personality differences put the kibosh on the idea.

Opportunities still exist for increased efficiency, both in the simple blocking and tackling of day-to-day operations and in the more capital intense but more lucratively rewarding shifts that are reshaping North American logistics.

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An example of the fundamentals is matching daily distribution needs with the lowest cost carrier. That’s the nuts-and-bolts of software for a transportation management system (TMS), which provides visibility to trucks on the road with unused capacity.

Nistevo Corp. was a TMS pioneer in 1997, before the dot-com bubble burst and Internet exchanges were all the rage. Dozens of major food companies joined Nistevo’s TMS network, which essentially replaced freight forwarders and other logistics middlemen. Nistevo is now part of IBM, and TMS was sold off last fall to UK-based Kewill, but the need to maximize truck utilization rolls on.

It was 2004 when TMS services first were used by Swift & Co. Back then, the in- and out-bound truck transport system was called a “hosted software service.” Today’s term is cloud-based, and Swift is a part of JBS S.A., but the essentials remain the same.

“It’s a closed or private network that companies and carriers can use to negotiate rates, volumes and other contract parameters,” explains Walt Heil, vice-president of Multimodal Transportation Solutions for Kewill’s U.S. operations in Chelmsford, Mass.

More than 15,000 North American common carriers are in the TMS database. A food company like JBS can view a route map and identify outbound trucks enroute to a given market on a given day and ask if back haul capacity is available. If it is, information about the truck’s owner is disclosed, and the parties negotiate a deal.

JBS uses the program to manage relations with about a third of the TMS database, moving 6,000 loads of beef and pork out of 25 locations, including seven U.S. and two Canadian plants, plus 16 cold storage facilities. JBS jealously guards on-time delivery and order fill rates, Heil says, but “trucks on average are 95 percent utilized.” And that means more logistics costs drop to the bottom line.

Fill ’er up

Warm fuzzies go with every announced shift away from diesel and toward alternative fuels. Rhetoric about greenhouse gas reductions and sustainable practices accompanies the announcement, but hard-headed business considerations are the real drivers.

Volatile petroleum prices are a forecasting headache, making natural gas, either in a compressed or liquid form, an attractive alternative. More importantly, CNG and LNG are significantly less expensive and likely to stay that way.

Natural gas in a liquid state has more concentrated power, but the octane in gas compressed to 3,600 psi is proving adequate for hauling some of the industry’s heaviest loads. Anheuser-Busch Cos. conducted trials last year with two tractors outfitted with CNG-burning engines, transporting 80,000-lb. cargoes on trucking lanes from its Houston brewery to Dallas and San Antonio. Based on the results, the company ordered additional tractors to replace 66 diesel-powered trucks, according to James Sembrot, senior director-transportation at the St. Louis-based firm.

“Texas has a very high density of compressed natural gas refueling stations, and there are a lot of options for refueling,” says Sembrot in explaining the decision to conduct the trial at the Houston plant.

Developing a refueling infrastructure is a capital-intense challenge, and considerable progress has been made in recent years. There are 811 public CNG stations nationwide, according to the U.S. Dept. of Energy. Not all of them can accommodate semi-trailers and other large trucks. Nonetheless, the options are much greater than the 69 public-access LNG stations.

Outfitting a tractor to burn alternative fuels adds about $45,000 to its cost, most of it associated with the necessary carbon fiber tanks. Fuel-cost savings produce about a two-year payback, and some food companies have sidestepped the issue altogether by working with carriers who supply the trucks. General Mills Inc. began working with Dart Transit Co. in May 2013, using 16 tractors to make deliveries within a 500-mile radius of Minneapolis. The program is a key element in the cereal manufacturer’s goal to reduce diesel fuel consumption by 35 percent.

The truck corridor between Green Bay, Wis., and Chicago has one of the highest concentrations of public CNG refueling stations, with two of the largest designers and operators of stations along the route. Building a station with the rapid-fueling systems necessary for commercial trucks costs about $1.2 million, but companies with geographically dispersed manufacturing networks like Frito-Lay North America are striking deals with fuel suppliers who shoulder the cost. “If you bring demand, you can get stations built,” says Craig Dickman, CEO of Green Bay-based Breakthrough Fuel.

Conversion to CNG looks great in a corporate social responsibility report, but the real driver is economics. “Shippers using Class A heavy-duty trucks will switch carriers for a half-cent a gallon savings,” observes Patric Rayburn, communications manager for Clean Energy Fuels, Newport Beach, Calif., the third major supplier of CNG refueling systems. With CNG currently selling at the equivalent of about $1 less than a gallon of diesel, the incentive for change is strong. Replacing diesel’s price volatility with CNG’s more stable cost also is attractive.

Whether the goal is to fill underutilized trucks or undertake game-changing shifts to alternate fuels, food companies are leveraging technological advances to drive down costs in logistics.

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