Cold chain change

by Deborah Aarts

Managing an ice cream supply chain is a delicate balance of expertise, diligence and responsiveness. Over the years, Nestlé Canada Inc has mastered it. So why is it tweaking the formula now? Deborah Aarts digs in.

It’s a scorcher of a day. The sun is pounding down through the heavy air; its heat reverberates off the sidewalk. Walking down the street, sweat beading on your forehead, you decide you could go for some ice cream. You enter the corner store, make your choice, pay and tear into the frosty treat. Suddenly, the stifling weather doesn’t seem so bad.

Variations on this scenario take place across Canada every summer. Millions of people depend on ice cream to be there when the need to cool down takes hold. Getting it there is quite a job.

Ice cream supply chains are uniquely complex. There are few food commodities more demanding of pure cold during storage and transport—and few more intolerant of any deviation from it. Like most frozen products, ice cream is subject to rigorous quality control checks. Topping it all off, demand can spike or plummet as quickly as the weather changes.

Over time, Nestlé Canada has mastered the nuances of this process. As the maker of such brands as Parlour, Häagen-Dazs, Real Dairy, Drumstick and Dibs, it makes more than 500,000 deliveries each year, most of which go directly to stores. Its logistics network was built to support such a model, with one factory in London, Ontario supporting five distribution centres across Canada: three owned by Nestlé (near Toronto, Montreal and Edmonton) and two run by third-party logistics provider Versacold (near Vancouver and Winnipeg).

But the established ways of doing business are changing, and so is Nestlé Canada. The company is currently in the middle of a major overhaul of its distribution strategy. The question is: why?

Keeping it cool

It’s hard to overstate the complexities of Nestlé Canada’s ice cream distribution processes.

It starts out simply enough: everything is made in large batches at the London plant.

“We might run one product—like pralines and cream, for example—for two straight days,” explains Mike Owens, the company’s vice-president of physical logistics. Once it’s made, the product does not stick around for long. “We have no distribution capabilities in our factory; it’s just a holding facility. As soon as the ice cream has cleared quality, we disperse it to the DC network.”

Once a product is manufactured, a supply planner decides where in the network it should go. This is when the trickier elements creep in.

In order for ice cream to be sellable, it can never sit in temperatures warmer than -20 degrees Celsius. To minimize any risk of spoilage during transport, Nestlé Canada mandates that all trailers must run at -25 degrees. In the DC, -28 degrees is the standard; for long-term storage, it’s even colder.

“There’s no other category that needs this depth of cold,” Owens points out.

These ultra-frosty standards are crucial to successful delivery, and the company fastidiously holds its supply chain partners to them.

Virtually all of the transportation is outsourced. A full 100 percent of factory-to-DC or DC-to-DC transfers are conducted by third parties. Any ice cream going to Western Canada is sent via intermodal railcar, a measure designed to reduce both the carbon footprint and the cost of shipping. The rest goes by truck. With the exception of a very small portion, distribution from the DCs to stores is handled by outside parties as well.

In the past, the company required that all trucks be pre-cooled to -26 degrees before picking up any load at the factory or a DC. It’s since changed the rules because trucking companies had difficulties maintaining that baseline in high humidity without a load. Instead, the trailers must be chilled to the temperature of the loading dock—typically a few degrees warmer—but running at -25 as soon as the load is on.

All trailers on trips longer than 12 hours are now equipped with Bluetooth-enabled temperature monitors. That allows the company to download temperature readings as frequently as it likes—and to know as soon as something drops out of spec.

“We really have solid, end-to-end tracking of temperatures, from the time we produce it in the factories to the time we receive it in the DC,” explains Greig Jewell, director of national warehousing and inventory control.

Within the DCs, temperature control is equally strict. Each facility is equipped with carefully calibrated monitors and alarms, with a team of on-site engineers in charge of the refrigeration system. At least once a year, the company will do a full test to make sure it’s all in good order.

In the unlikely event that part of the freezer system fails, the engineers would first investigate the situation. If the problem is big enough, workers will isolate the effects by closing doors and restricting traffic. If there is a major failure, the whole facility will shut down. Thankfully, the company hasn’t had to resort to such a drastic measure.

One of the more frustrating aspects of distributing ice cream is that the time when business is busiest is also the hottest season of the year. The more activity in a DC, the more dock doors have to open and close; the more outside air sneaks in, the tougher it becomes to maintain freezer temperatures.

 

Nestlé Canada has a number of strategies in place to avoid compromising the DC environment. If needed, it can reschedule activity; during a particularly humid period about three years ago, for example, it moved workflow at its Toronto-area facility so that workers were only loading and unloading trucks at cooler times in the day.

It also chooses facilities carefully. Most freezer DCs are built to handle normal frozen food temperatures (which hover around -18 degrees), not -28 degrees. If a building isn’t engineered properly, that 10-degree drop in temperature can be disastrous.

“In some facilities, the engineers will crank down the temperature of the room. Frost will travel through the room and end up down in the flooring. Next thing you know, the floor starts to crack and heave,” Owens explains.

To prevent this, the company chooses facilities with features like ammonia systems to pull down the temperature and floor spacers to prevent the spread of cold.

A changing business

Nestlé Canada’s ice cream supply chain practices have been, and continue to be, effective—they’ve helped the company hit fill rates of between 98 and 99 percent—but they are not cheap. Nor have they allowed the company much flexibility; in maintaining three very specialized bricks-and-mortar DCs, the company has been bound to expensive assets with limited potential for scalability.

With a changing business environment, the company has become less and less comfortable with this situation. The problem was not the temperature-controlled standards, the locations of the DCs nor the transportation routing, but the rigidities created by keeping its own facilities.

Approximately three years ago, it became clear that a change was in order. Two trends in particular made this necessary.

The first was the shift among customers—principally grocers—to move to flow-based inventory models. With Loblaw leading the way, many companies are cutting off direct-to-store deliveries made by manufacturers (including Nestlé Canada) in order to move product through their own DCs.

As part of the process, these retailers are pressing to pick up shipments at the factory. Because of Nestlé Canada’s lack of factory storage capabilities, this isn’t an option, but there are more requests to pick up pro
duct at the DC.

This is expected to greatly affect Nestlé Canada’s transportation operations. When grocers take over much of the hauling, the company will find itself with far less to move—which Owens says presents a problem in certain geographies.

 

“Suddenly, we’d end up with trucks running a lot of air. We can do some route engineering and draw back on the number of trucks, but if I’m somewhere like Sudbury, Ontario with one truck, I can’t cut that down to half a truck.”

Things will have to change within the DCs, too. When grocers move to flow-based models, their suppliers cannot continue to manage inventory as they did before. More frequent orders must be picked and staged differently.

“We had to take a look at our DCs and how everything was laid out within them,” Owens adds. “Our bricks and mortar weren’t going to support what was coming at us in the ice cream category.”

The second trend signalling a need for change was within Nestlé Canada’s parent company. The global company has been very open in its plans to spend two to three billion Swiss francs each year on bolt-on acquisitions. Some of these will likely fall into the frozen foods category; in fact, earlier this year the company purchased the Delissio line of frozen pizzas from Kraft. It’s possible these items could end up sharing delivery and storage space with ice cream.

With new categories of food coming in, it became increasingly difficult to justify owning dedicated facilities for ice cream alone.

Time to outsource

With these two trends building, Owens and his team sat down to reconsider Nestlé Canada’s approach. They talked about the challenges on the horizon and what the business would look like three to five years out.

“We needed to look at the shifting marketplace, our customer’s strategies and the company’s strategies. We thought that all through,” he recalls.

“Originally, this was a project to help us manage variability, not only of our supply based on seasonality but as our customers reorganize their own supply chains,” adds Jewell.

The team’s plan kept the cold chain best practices cultivated over the years more or less as they were. The biggest change involved who would be doing the work. To become more flexible, Nestlé Canada would pull out of its own facilities once the leases expired and hire a third-party logistics provider to handle its warehousing services.

“With ice cream, we realized that in order to have the infrastructure necessary to support the future business, we’d have to move to a 3PL,” Owens explains. “We wanted to partner with someone who could provide full visibility or, at the very least, move us into some type of shared-user facilities.”

Of course, outsourcing was nothing new to Nestlé Canada—its Vancouver and Winnipeg facilities had been third-party run for years. But handing off the whole business would require some serious thought.

 

Owens and his team developed a high-level scope document for the project and clearly defined the deliverables. They then formed a steering committee and got executive sign-off to proceed.

From there, it was time to choose a partner. The team submitted the scope document to a consultancy—Montreal, Quebec-based KOM International—which agreed to help with the request for proposals (RFP) process. Taking the time to do this right was crucial, Owens recalls. “The more you put up front in the RFP and the cleaner your data, the more accurate feedback you’ll get from the vendors. There will be fewer surprises down the road.”

Working with KOM, the committee created a list of potential vendors and made contact with them to let them know an RFP was coming. Attached to the correspondence was a letter of confidentiality; if the vendors wanted to proceed, they would have to sign it. Those who did sign off were given a copy of the RFP.

To make the process as fair as possible, Nestlé Canada answered all questions submitted by vendors during a set period and shared the answers with all bidders, a measure intended to level the playing field as much as possible.

Once the bids were in, the committee called on three shortlisted vendors to make presentations. After evaluating the data and running through a series of ‘what if’ scenarios, the team selected Versacold—the same company it was working with in Vancouver and Winnipeg.

Nestlé Canada drafted a letter of intent and went on a tour of some other Versacold facilities. One DC in California offered a glimpse of what Nestlé Canada wanted at its Canadian facilities: things like an in-house WMS, voice-picking and task management. Versacold’s willingness to invest in such technology was a big draw. “They needed to be leading-edge with warehouse management…to play with the large companies, and that’s exactly what they’ve done,” Owens says.

The committee set out a contract that included not only the terms of the agreement, but the intent behind each of the terms as well. “In the event that one of us gets hit by a bus or moves on to another company and new managers come into place, we’ll have a document that says ‘this is the intent of the clause,’” says Owens.

He adds that Nestlé Canada’s familiarity with Versacold has helped, but he’s under no illusions that the transfer will be flawless. “We’re in with a partner we’re familiar with; it’s not like we’re working with an unknown entity. But even so, we’re looking for areas where there might be issues and identifying them upfront.”

 

“It’s a long-term relationship,” adds Jewell. “They’re not looking for a quick profit, we’re not looking for quick cost savings.”

Making the switch

Nestlé Canada is currently right in the middle of switching its warehousing activities over. Running off a transition plan with some 1,200 action items, all parties are working to make the transition as seamless as possible. Versacold has been working to upgrade the five DCs—which are located in the same five cities as before—with WMS and voice-picking technology.

The two companies have held weekly meetings to talk about the knowledge transfer involved in the transition—everything from electronic data interface to SAP integration to route accounting, inventory control and customer service, to name just a few factors.

“Now we’re drilling down into how we learn it, how we teach it, what it takes and who owns what,” Jewell says. “We have [Versacold] on site at our site, and our supervisors are working with them at their sites.”

The actual cutover is slated to take place later this year, but the plans are already set out. “That’s very technical, because it involves moving customers’ goods from one site to another, changing route numbers for our distributors and switching all the handheld communications infrastructure,” Jewell adds. “It’s not just a case of picking ice cream from a different location.”

There’s one area of the transition the company has taken extra steps to manage proactively: staffing. The closure of three of Nestlé Canada’s DCs will mean that most employees at the facilities will find themselves out of a job once the changeover takes place.

The team wrestled with how to handle this. Should they keep quiet and risk workers finding out through the grapevine? Or should they let those affected know immediately, which could unleash a torrent of bad morale?

“We thought long and hard about whether we should try and hide it from the employees. But that would have created a ton of rumours, and it really didn’t adhere to the values Nestlé espouses,” Owens reflects. So the company told all affected employees th
at they had 13 months left on the job. That’s 13 months of regular work; to make the situation as fair to workers as possible, severance payments will not start until the DCs close.

To prevent morale and safety standards from slipping in the final days of the DCs, Nestlé Canada launched a new bonus structure for 2010: every quarter, employees with no incidents or health and safety violations are being issued a $500 bonus.

 

“Safety is a concern when you’re closing facilities,” says Owens. “We’re putting a very strong focus on it. The money makes it easier for them to focus on safety; it’s a nice chunk of change that goes to their pocket.”

All eyes ahead

Knee-deep in a project that has kept the whole team very busy, both Jewell and Owens are fairly confident that the tremendous amount of work to transform the network will make the ice cream supply chain nimble enough to handle whatever’s next. The need for such agility has been reinforced this summer: the company has experienced an unforeseen double-digit spike in ice cream orders. It’s just another example of how volatile the business can be.

Had the committee not taken the time to identify and really consider the ramifications of changes looming on the horizon, Owens is not sure how the ice cream business would be faring today.

“Our customer’s strategies were in direct contradiction to where we were going,” he says. “Sometimes you need that burning platform.”

And he and his team are constantly looking forward to make sure the company is ready to take on the next sea change. “It’s not just me that has my head up, it’s my leadership team. Having that many eyes on the business, we’re more likely to catch a trend sooner rather than later.”