December 1, 2008
vertical focus | Food & Beverage

A tale of two reorganizations

a tale of two reorganizations

After seismic corporate shakeups, two food and beverage industry giants re-evaluated their transportation strategies ... and came to completely different conclusions.

By Susan K. Lacefield

In August 2004, consumer products giant Procter & Gamble spun off the Sunny Delight beverage brand, selling it to Boston-based private equity firm J.W. Childs Associates. As part of the transition service agreement, Sunny Delight would have to wean itself completely off Procter & Gamble's systems, including its transportation system, within a year. "All at once, we were a business with $550 million in sales and no systems," says Jim Glendon, Sunny Delight's supply chain director.

One of the immediate decisions the company faced was whether to manage transportation internally or look for outside help. It quickly decided on the latter.

That same year, another private equity firm, CDM Group, acquired Aurora Foods, owner of several iconic yet, at the time, struggling brands. The move cleared the way for CDM to bring products like Duncan Hines baking mixes and Mrs. Butterworth's syrup under the umbrella of Pinnacle Foods, a $1.5 billion grocery manufacturer and distributor that has made a business of revitalizing timehonored brands.

Like Sunny Delight, Pinnacle had to make some quick decisions on how it would manage transportation. But unlike the beverage maker, Pinnacle chose to end its relationship with a third-party logistics service provider (3PL) and bring the task back in house.

Sunny's disposition
The details may vary, but stories like Sunny Delight's and Pinnacle's have become commonplace in recent years, thanks to a wave of mergers, acquisitions, divestitures, and spin-offs in the food and beverage industry. Figures from the Food Institute show that a total of 413 mergers and acquisitions were completed in 2007, with an additional 60 in process. That came on top of the 392 deals that had been completed the previous year.

Many companies would see this type of shakeup as a natural opportunity to reassess their operations, taking a fresh look at everything from marketing strategies to distribution networks. In Sunny Delight's case, however, it was more than an opportunity; it was a necessity. It had both a mandate and a deadline to restructure its transportation operations.

As Sunny Delight began working out how it would manage transportation, it quickly rejected the idea of going it alone. Its core competency was making and marketing beverages, not transportation and logistics. "We could have hired a staff, developed our own expertise, negotiated with carriers, and put in our own TMS [transportation management system] et cetera, but we would never have had the scale, the knowledge of the industry, the expertise, the systems that a 3PL brings to the party," says Glendon.

The same factors that informed Sunny Delight's decision to outsource also influenced its selection process. "Our selection was based certainly on price but also on the systems capabilities, the scale, and the expertise of the provider," says Glendon. Lacking systems of its own, Sunny Delight was especially keen to partner with someone who could provide instant access to sophisticated technology, he adds. "With everything else that we had to put in place—our WMS, our core accounting systems, all our plant systems, order shipping, billing, on down the line—if there was anything that made sense to outsource, that's what we wanted."

After evaluating five bids, Sunny Delight chose Transplace, a Frisco, Texas-based third-party logistics and technology company. Among other advantages, Transplace had done business with Procter & Gamble in the past and was familiar with the systems Sunny Delight had used when it was part of the P&G fold. That shared background promised to make the transition to a new transportation structure easier.

As Sunny Delight had hoped, the transition went smoothly. With assistance from the 3PL, the beverage company was able to get off Procter & Gamble's systems and onto its own by the mandated deadline.

Today, the two enjoy an almost seamless collaboration. "[Transplace] acts as if they are part of the business in terms of the sense of urgency and the sense of ownership that they feel toward the business. And that extends all the way from looking toward how can they improve results to their transportation coordinators answering the phone as Sunny Delight," says Glendon.

As an example of the partnership's depth, Glendon points to the quarterly review meetings with Sunny Delight's top carriers. "It's a joint meeting with Transplace and Sunny Delight," he reports. "So even though Transplace is paying the carriers every week, we want to make it clear to [the carriers] that this is a partnership, and they are speaking on our behalf."

Hitching up without a hitch
But the story doesn't end there. Three years after the divestiture, Sunny Delight was ready to do some acquiring of its own. In October 2007, the company bought Fruit2O flavored water and Veryfine juice from Kraft.

Just as Transplace had helped ease Sunny Delight's separation from Procter & Gamble, it also helped its customer integrate the two new brands into its operations. Among other advantages, the 3PL's contacts and expertise proved helpful in arranging for the dry van service that would be needed to transport the Fruit2O and Veryfine products.

Working with dry van haulers was a first for Sunny Delight, which ships its own products via refrigerated trucks. "It was a whole different set of transportation needs," says Glendon. "We were looking at different carriers, and we needed to quickly get bids under way and carriers established." Speed was of the essence here because Sunny Delight had just 120 days after the deal was signed to integrate the two new brands into its system. But Glendon reports that, with Transplace's help, Sunny Delight was able to meet the project's deadline.

At the same time it was lining up carriers, Sunny Delight was also working to come up with an overall distribution plan—figuring out what products to store where, what transportation lanes to use, and how much volume to ship. Before the acquisition, the Kraft brands' products were being shipped from two Kraft plants and 12 mixing centers. After Feb. 24, 2008, the beverages would be shipped from five Sunny Delight plants.

Once again, Transplace stepped in to help Sunny Delight work out the details. "They had an equal seat at the table in terms of understanding the scope, the requirement, and the timing," says Glendon. Not only did Transplace participate in all of the planning meetings and discussions, but it also dispatched a delegation to visit the Littleton, Mass., plant that Sunny Delight acquired as part of the deal. Before the handoff, Transplace managers went over all the details with the facility's management to make sure that they were familiar with the plant's standard operating procedures and had full information for carriers, including the location of the drop lot and guard house.

The support Transplace provided helped ensure that Sunny Delight was able to integrate the new brands into its operations "without a hitch," says Glendon. In fact, the project went so smoothly that when Sunny Delight recently made another acquisition, it set an even more ambitious timeline. In early October, it signed a licensing agreement with Kraft to produce and market the Crystal Light ready-to-drink bottled beverages (Kraft will continue to make and sell the powdered versions of Crystal Light). This time, Sunny Delight expects to fully integrate the new brand in 60 days. Glendon is confident that the company will easily make that goal.

Out of control
Whereas Sunny Delight opted for the 3PL route after its reorganization, Pinnacle Foods chose another path entirely. Not long after its acquisition of Aurora Foods in 2004, it decided to discontinue its relationship with the 3PL that had been managing its transportation and bring that responsibility back in house.

The reasons for Pinnacle's decision were simple enough: poor performance. When Gregg Bostick was brought in as vice president of transportation in 2005, he found an operation hamstrung by high costs and inconsistent deliveries. "Freight cost and linehaul were out of control," says Bostick. "They had no KPIs [key performance indicators] in place, no metrics. They were not even measuring on-time delivery. What we needed was to inject some discipline into the process."

The problem was not a lack of tools. Pinnacle and its 3PL had already contracted with LeanLogistics to use its on-demand TMS, but the 3PL hadn't implemented the system. As a result, the company couldn't get a handle on how it was performing. "I asked them what the weighted average cost per lane was," Bostick says, "and it was like I asked them to grab a star out of the sky."

To be fair, the fault didn't rest entirely on the 3PL's shoulders, Bostick admits. "They were set up for failure," he says. At the time, Pinnacle Foods was so focused on turning its brands around that it instructed the 3PL to make sure that customers received their orders no matter what it took, he explains. Under the circumstances, it was probably no surprise that the 3PL lost sight of cost containment along the way.

When Bostick came on board, he decided to give the 3PL a chance to redeem itself. He detailed to the company exactly how it was failing and insisted that it put clear KPIs in place and start using the TMS. But the company really didn't have anyone who could use the LeanLogistics system, and costs continued to spiral out of control. "By the time we had the 'Last Supper,' so to speak, they knew it was coming," Bostick says.

Righting the ship
After deciding to sever ties with its 3PL, Pinnacle then had to figure out how to regain control of its processes. Rather than seek another 3PL, Bostick decided the company would be better off bringing transportation management back in house. Some Pinnacle executives expressed concern about the cost, but Bostick assured them that he would be able to save the company $5 million to $10 million.

The first step was to build the right team. Bostick accomplished this by hiring several former colleagues and redefining some existing employees' jobs. For example, after he discovered that his director of operations was also being asked to manage relationships with more than 90 carriers, Bostick hired a new director of operations to free up the previous director to do what he did best—handle carrier relations.

Next, Bostick developed a standard process for procuring transportation services and negotiated volume rates with carriers. "In the first six months, we saved $1 million in rates, but we didn't do that by beating up on carriers," he says. "We simply went to our carriers and said 'We will commit to these lanes and loads if you commit to these rates.'" Bostick also standardized fuel surcharge tables for all carriers—a step that he says saved the company an additional couple of million dollars.

Other key steps included implementing routing guides for the day-to-day allocation of shipments to carriers, implementing KPIs like cost per case and cost per mile, and negotiating discounts with carriers for prompt payment. The company also modeled its network to look for ways to save money. After the modeling exercise revealed that it could obtain lower rates by assigning carriers to desired routes and shipping direct from Pinnacle plants to customers' DCs, the company followed through on the recommendations.

Bostick admits that none of his tactics was anything out of the ordinary. "I'm convinced that a good 3PL could have come in and done the same things," he says. But by bringing transportation back in house, Bostick was able to gain control quickly and create accountability for transportation.

As for the payoff, it turned out that Bostick over-delivered on the promise he had made to Pinnacle's management team. Instead of saving the company $5 million or $10 million, he saved a whopping $25 million.

Happy endings
The takeaway from these two stories is that when a major shakeup occurs—whether it be an acquisition or a divestiture—it's important that the company pause and reassess its priorities. For Sunny Delight, it was selling and marketing its beverages, not becoming a transportation expert. For Pinnacle Foods, it was regaining control of its processes. Once they had made these determinations, both companies were able to see a clear way forward ... down their very different paths.

About the Author

Susan K. Lacefield
Editor at Large
Susan Lacefield has been working for supply chain publications since 1999. Before joining DC VELOCITY, she was an associate editor for Supply Chain Management Review and wrote for Logistics Management magazine. She holds a master's degree in English.

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