Bread Distribution

Problem:
A regional bread company continued to lose money in one of its major territories after consolidating its bakery operation in a low-cost region.  The company believed that it needed to expand its shelf space and increase its account coverage in order to generate the volume necessary to cover its fixed distribution costs.

Process:
The success of this project relied on conducting six sets of analyses:

1. We accompanied bread delivery drivers on several different demographic bread routes in order to understand the key drivers of the cost structure.
2. We restructured the cost components within the income statement based on the way costs were actually incurred.
3. Using the revised income statement, we benchmarked the client's territories against one another and, from this, ascertained that the problem territory was not aligned with the profitable territories
4. We conducted  time-and-motion studies in order to accurately develop activity-based costing.
5. Finally, we remodeled the business based on assumptions in changes in business activity.

Result:
After learning the facts, the client abandoned its faulty strategy and implemented a plan that significantly increased profitability.
 
From our analyses, the client learned that its efforts to increase profitability by expanding shelf space and additional accounts was, in fact, the cause of its continued losses.

1. Synxronos’ observations made during its visits on bread routes revealed that the client had too much shelf space at large supermarkets and was calling on too many small convenience stores that did not have the customer volume to turn their bread inventory. We found that the territory a) was exhibiting a stale rate twice as high as in other territories and b) had too many drivers serving too many marginal accounts.
2. Based on this, the income statement was restructured such that the P&L showed the profitability of bread sold and then showed a separate line item for the cost of stale bread. Previously, the cost of stale had been incorporated into a total cost-of-goods line.
3. After revising the P&L, we benchmarked the territory against the other territories.  This analysis revealed that the profitability in the target territory was equal to that of other territories when looking at the P&L of sold bread.  The cost of stale product, however, was twice that in other territories, and was the cause for its operating losses.
4. After identifying that the high stale rate was the cause of the operating losses, we conducted a time-and-motion study to determine the true cost associated with stale bread.  This involved measuring the time required to deliver to large supermarkets and small groceries, as well as return stale bread.  This information provided the necessary data to model the true cost of distribution and led to the development of P&Ls based on various types of store (e.g., large supermarkets and small grocery stores) as well as brands (e.g., private label, different branded names).
5. We identified the brands and stores that had excessive stale rates and modeled the P&L based on eliminating these from the territory.  With this information, the distribution channel could be resized.  The result of this analysis identified that by not calling on 80% of its customers, the client would only realize a 20% reduction in revenue, yet achieve, through the elimination of brands and stores, a 60% reduction in its distribution cost and bring the stale level consistent with the other territories.  The net result was a return to profitability consistent with the best territories. 

The actual implementation of the plan showed identical results to those modeled. The company rolled out similar analyses in more profitable territories to increase its overall profitibilty.