Sophisticated modeling tool helps Caribou Coffee chart the right course

In today's world of instant gratification, four years is not just a long time. It is an eternity.

The same holds true in the world of physical distribution. Planning one year out is difficult enough. Going out four years, with all the variables that entails, is a crapshoot.

"It is an 'as best as you can' process," says Paul Turek, vice president, supply chain for Caribou Coffee Co. Inc., the nation's second-largest retail coffeehouse operator.

Nevertheless, it is a process that Turek and Caribou felt compelled to undertake. Nearly two decades of growth had put severe strain on the company's distribution operations, and management didn't see things changing anytime soon. It was clear the company would have to build out its distribution network, but Caribou didn't want just a short-term fix. It wanted a long-range strategy that would serve it well into the future. And for that it would need some serious modeling and planning tools.

Identifying the pain points
With 412 owned stores and 97 domestic and international franchise locations, Minneapolis-based Caribou may be best known as a retailer, but it also has a thriving commercial business. In fact, it was growth in the commercial channel that prompted the company to go down this road. Five years ago, the commercial business, which includes sales to grocery stores, office coffee services, and hotel, sports, and entertainment venues, accounted for just 2 percent of Caribou's business. Today, that number has risen to about 10 percent of Caribou's $262 million in annual sales.

The growth, while relatively modest in total dollar terms, has nonetheless stretched the capacity of Caribou's sole distribution center, a 46,000-square-foot facility in Minneapolis. DC space became so tight, in fact, that the company had to rent off-site public warehousing to handle the overflow during peak periods.

In an effort to assess how future expansion in the commercial segment would affect its space needs, Caribou decided to seek outside help. In 2007, the company hired Long Grove, Ill.-based supply chain consultancy TZA to develop a network modeling program that evaluates various sales and inventory scenarios and determines the most efficient and practical distribution network to meet those requirements.

Turek says Caribou needed a way to deliver a "good outside assessment" of the effect that growth in its commercial business, as well as other business units, would have on its inbound and outbound activity. Turek also wanted to know, based on various sales and inventory alternatives, when Caribou would experience capacity crunches so severe they could disrupt its business.

"We wanted a heads-up on when and where our pain points would be," he says.

After conducting its analysis, TZA concluded Caribou would be best served by staying with a single DC in the Minneapolis area, given that most of its vendors were already based in the Midwest. At the same time, it warned the company that based on the various growth scenarios, Caribou's DC would likely reach capacity sometime in the 2009-10 time period.

With that deadline approaching, Caribou went back to TZA in 2009 and asked it to update the modeling tool to reflect new sales growth assumptions for its core business and additional business units. In particular, Caribou wanted the consultant to determine the lifespan of its existing DC and assess the need for a new facility based on projected sales and inventory patterns through 2015.

Getting on the green
As in 2007, TZA's updated assessment indicated that Caribou's best bet would be to stick with a single DC in the Minneapolis area. It also estimated that a 7-percent increase in rack locations would be enough to extend the life of the current facility and meet the company's short-term needs. At the same time, the model showed that to handle its projected growth, Caribou would eventually require a facility of between 150,000 and 200,000 square feet. Turek says the company would likely move its DC operations to a bigger location rather than expand its current facility.

Turek says the modeling tool has been an invaluable and cost-effective support to Caribou's supply chain operations. Most of the cost was sunk on the initial purchase in 2007 at what he calls a "reasonable" price tag. The updating in 2009 was done at very marginal expense, Turek says. Caribou now plans to update the model every two years, he adds.

The TZA tool "allows us to run very accurate business channel scenario simulations," says Turek. "It is very good at analyzing our operations from a macro perspective, as well as from a more granular framework. It is flexible enough to allow us to update the model as things change, so we can take a rolling five-year snapshot and make good judgments based on our projected product mix and product platforms."

Turek acknowledges that no model is infallible when looking five years out. But the TZA tool "will get us on the green," he says.

A better plan
Travis Staley, a TZA project manager who coordinated the Caribou project, says the modeling tool is beneficial for any company trying to understand how the many variables that affect its operations will drive future inventory and distribution requirements.

"The result is that we help build a better plan for a company's future needs," he says. "Without it, a company like Caribou might not know how [various growth scenarios] would affect its inventory requirements."

Most important, Turek says, the model minimizes the risk that Caribou will overspend on any future DC budget allocation. Or, worse yet, underspend.

Without the modeling software, he says, "we might come up short" in estimating Caribou's capacity needs accurately. The TZA tool "keeps us from reacting and panicking, signing leases under duress instead of [following] a planned and methodical process," Turek adds. "It has helped us extend the life of our facility and get better utilization out of it, all the while getting a peek [at] what our next 'pain points' may be."