Candy giant Hershey Foods understood what it needed from its supply chain: efficient, customer-driven processes able to flex with the changing market requirements of its key U.S. customers. The solution that flowed from this vision includes new and flexible distribution centers equipped with best-of-breed decision-support systems managed by experienced third-party operators.

This new supply-chain strategy debuted last year with the company's eastern distribution center, or EDC III. The 1.2 million-square-foot distribution center, near company headquarters in Hershey, Pa., is a stone's throw from the existing EDC I and EDC II distribution centers that serve the east and northeast regions. In its few short months of operations, EDC III nearly has halved the company's order-cycle times of a year ago while dramatically boosting inventory accuracy. With another 600,000-square-foot distribution center now open in Atlanta, enhancements under way at the company's facilities in Salt Lake City, Utah, and additional distribution centers planned for Southern California and the Midwest, Hershey intends to expand the EDC III efficiencies throughout its U.S. network by 2003.

"Our customers are seeing improved cycle times in their orders and better on-time performance," says David E. Menicheschi, director of distribution. "The fees we were being charged because orders were late or incomplete essentially have gone away, and these were very problematical in 1999."

Inventory location accuracy is at 99.96 percent, in a facility that has 165,000 pallet positions, Menicheschi adds. "And since EDC III allowed us to close several overflow warehouse facilities in the northeast, we have been able to take those savings as well as the money we once spent re-handling product and reinvest those funds to provide greater flexibility within our network." Hershey intends to handle 2.6 billion pounds of product at EDC III alone during 2001, he says.

Reliable product availability is critical to a business that has five key and distinct "holiday" seasons. Last year Hershey racked up $4.5bn in sales, a large chunk of which came from sales associated with Valentine's Day, Easter, "back to school," Halloween and Christmas. A network of 19 manufacturing plants, eight contract manufacturers and more than 20 co-packers feed products into the company's distribution facilities.

The company nearly choked on its increasing volume in the late 1990s when separate forces effectively clogged supply-chain arteries. For starters, Hershey had experienced healthy internal growth throughout the decade, steadily increasing sales of its standard products while adding new items. A second factor emerged in 1996, when the company acquired Leaf Candy Co. "We basically bought a $450m business with a product line of 1,300 SKUs that had a significantly different weight profile and business complexity than our traditional products," explains Menicheschi. Though the transaction included distribution facilities as well as manufacturing plants, Hershey closed the Leaf distribution facilities and integrated Leaf products into its own Hershey distribution network, all without any change in the Hershey facilities. According to Menicheschi, this created a variety of internal operational complexities. For example, much of the Leaf business consisted of outbound shipments in the 2,300 to 3,000-pound range, while the Hershey shipment profile leaned far more heavily toward truckload lots. Additionally, the extra product took up valuable warehouse space and system capacity Hershey did not have to spare.

Things came to a head for Hershey in 1999 when an assortment of snafus associated with a troubled SAP implementation - all exacerbated by pressures radiating from the aforementioned factors - created customer service failures. Hershey missed its fourth-quarter numbers, and its stock price plummeted.

Hershey's logistics team hardly remained passive during this three-year period, but the activity largely was reactive in nature and driven by immediate need. Instead of having large major distribution centers with room to expand, the company was operating smaller distribution centers already stuffed to the gills. As demand for additional storage space continued to rise, the tendency - particularly as the company built inventory for its specific selling seasons - was to secure short-term storage space on the open market.

As a result, warehouse annexes were opened as temporary storage facilities for the distribution centers. However, most of these facilities were used only to park product. little outbound shipping to customers was performed at these locations, because they lacked the requisite space, information systems and operational capabilities to pick, process and stage orders.

"We ended up shuttling product back and forth between the annexes and the distribution centers," Menicheschi recalls. "Our product and distribution network rapidly was being fragmented - we had 24 distribution centers and smaller warehouses - and that got even worse when our product complexity began to change. The average weight per pallet began to go down, the amount of storage we needed began to go up, and we began buying spot surge facilities." Consequently, in addition to EDC I and EDC II, which together provided 1.1 million square feet of warehouse space, and three warehouse annexes already operating near those buildings, Hershey opened six additional buildings in the Northeast to park overflow product. It even used space in some of the company's manufacturing plants for surge storage.

Though Hershey began planning for EDC III in 1997, the company's thinking lacked a national focus until mid-1998, when it combined its logistics and distribution functions and assigned Menicheschi, then-director of supply-chain integration, to put together a comprehensive supply-chain strategy.

Working with his logistics team and tapping other corporate resources in marketing and planning, Menicheschi assembled a view of what Hershey customers were going to expect in coming years with regard to service, cycle time, logistics flexibility and customization. "We needed to look at growth projections, the number of SKUs we would be handling, the way pallet configurations were likely to change, and what customers would expect from us with regard to cross-docking and modules and customization and store-ready issues," says Menicheschi. "We then had to figure out what we needed to do in terms of our network and distribution facilities to support that vision."

To collect that customer information, Hershey largely focused on data from and about a core set of customers such as Target, McLane, Wal-Mart and CVS. The logistics team gathered data on elements such as delivery expectations, seasonal merchandise and event merchandise requirements. "When Kmart tells you that they want to have an SKU layered on each pallet so there's a put-away logic when they unload the truck, you need to listen or you won't be competitive in the long term," says Menicheschi. "And when Target says they want to ship 316 trucks of Hershey's chocolate in three days in September, cross-dock that freight at all its major distribution centers and get that merchandise into the stores, we have to be ready as a company to handle 316 trucks in three days with Target's customized module program, and do it all flawlessly. Those are the things we looked at to see where we needed to be with our distribution center capabilities."

Another critical concern was co-packing, which involves building merchandising displays and customized store-ready product assortments - a technique that helps Hershey customers merchandise Hershey products. "Co-packing is not only a manufacturing and marketing strategy, it's a flexible logistics strategy as well," explains Kenneth D. Miesemer, general manager of distribution for Hershey's eastern region.

Point-of-Sale Displays
"If you can fill the last 4 percent of demand for your customers by being able to customize that product at your distribution center, you take out some of the error problems associated with forecasting," he explains. "It's our go-to-market strategy because it adds new variety and new point-of-sale displays at the store level, often targeting impulse purchases. Our customers are saying that we have to help them with their distribution problems by bringing store-ready modules so they don't have to pack shelves or take products off pallets. It becomes a flow-through process right to the store."

The Hershey team then created a network model that established five selling and shipping zones that would enable Hershey to turn customers orders within 24 to 48 hours of an order being passed to a distribution center. "Our goal was to improve cycle time from a very poor 10-plus days to a cycle time of five to seven days from receipt of order to delivery," says Menicheschi.

Armed with that vision, he and his associates were able to get management approval to fast-track EDC III and to proceed with a new facility in the Southeast. Approval for the latter project was issued Nov. 25, 1999, and Hershey began operations in the new Atlanta distribution center on May 2, 2000. A new facility for Southern California, approved by management in December 2000, is to be operational this September, and Hershey intends to expand its presence in Salt Lake City in 2002.

With EDC III on the fast track, Hershey turned its attention to non-construction matters. The company long had embraced third-party operators for its distribution centers. "Our expertise is in manufacturing and marketing, and for many years we have used a third-party strategy to actually do the warehouse operations," says Miesemer. Hershey conducted a stringent operator selection process and selected Power Logistics to run EDC III. Power Logistics is a unit of The Power Group, St. Charles, Ill., an outsource provider of manufacturing and logistics capabilities to Fortune 500 food and consumer products companies. It currently operates more than 20 U.S.-based facilities with additional operations in Germany, Canada and the UK.

"We had a chance to see some of their operations at Kraft and Hormel and absolutely felt that those were world-class distribution centers," Miesemer says. "We wanted that same kind of operating process and mentality here."

Still, the site visits were critical. "One of the best practices we have found in this whole process is that the site management team of a third-party provider is one of the most critical elements to success of a distribution center," Menicheschi explains. "A third-party company can have a large staff and a lot of talent and super technology people at their corporate offices, but the site management team members that they bring to the distribution center are the people who really get it done. So when you look at the infrastructure of a third-party provider, you can't be swayed by their huge vision. Although you have to have that background and support, what you really need is a strong, cohesive site team that melds with your team to get it done."

Attention then turned to systems selection. "We had gone from legacy systems to SAP with the intent of SAP serving as our transaction system," recalls Miesemer. "We then would buy best-of-breed decision-support systems and integrate all those with SAP."

Accordingly, the next key piece was the warehouse management system. Hershey wanted a world-class information system, not a 3PL's proprietary system. They looked at Catalyst, EXE Technologies, Optum, McHugh, MARC and the rest of the major players, says Miesemer. "There are a lot of good capabilities out there, but when we applied a grading metric and began looking at some of the special kinds of tools that were needed for such a big building, the complication of the yard and the labor, most of the vendors fell out of the process."

Eventually Hershey selected McHugh's DM+ warehouse management system. Though Hershey made some changes to coding to accommodate special product rotation rules as well as billing processes for complicated pool shipments that require specialized sub-bills and master bills, it tried to stay away from making changes in the core allocation process. "We wanted to keep that as vanilla as possible," says Miesemer.

A prime Hershey consideration was the need for an integrated labor-management tool. "We will have 650 people working this facility when it is running at full strength. With that many people, you want to make sure that your people are effective, and you want to know who's not hitting the standards so maybe you can go back and do some additional training," he adds. "We also wanted a really strong database that would support our use of metrics, because we operate this building by metrics."

Another big plus for Hershey was McHugh's task interleaving capabilities. "With a building of this size, you cannot order-pick or put-away as a dedicated function," explains Miesemer. "There has to be a coordination of the functions to counter the effect of the travel distances." In the present EDC III operation, as a lift driver puts away two inbound pallets, the WMS assigns to that driver via his lift-mounted RF unit the next closest task, which might be to take two pallets from an adjacent storage location over to the pick line. The system monitors where the people in the distribution center are and keeps those forklifts full as often as possible. Another attraction was a Palm bolt-on package designed by Gagnon Associates that features an activity-based costing function for labor.

Once the WMS decision was made, attention then shifted to other decision-support tools. Hershey selected the Manugistics transportation management, forecasting and distribution requirements planning modules for EDC III.

Hershey, Power Logistics, McHugh and Accenture (then Andersen Consulting) conducted extensive testing before bringing the system on line. Even then, the first several weeks of operation were dedicated to building inventory and performing inter-facility transfers of stock.

Meticulous Testing
"We wanted to make sure we did not burp at all when we started up the system," says Menicheschi. "The last thing we wanted was any suggestion that we had another SAP-kind of a slow start, so we tested and retested. When we got into our integration testing, we probably had at different points of time 30 people sitting out in the cold of the mezzanine running through very detailed test scripts and testing all the different scenarios as to how the integration works between SAP, transportation planning and management and the warehouse management system."

Groundbreaking for EDC III occurred the first week of August 1999, and the first truck arrived on April 28. "Our plan was to give ourselves a chance to learn all the shipping processes before we interfaced with customers," says Miesemer. "New systems, new routines, new team, new building, new equipment ... we didn't want to go to customers and have any failures. This plan enabled us to work any bugs out of the system and give our team an opportunity to learn the systems and become accustomed to loading and handling our products."

The first inter-facility shipment left EDC III on May 18, and the process went so well that Hershey began shipping to customers on June 30, a month ahead of its Aug. 1 target date. "We had a detailed chart that set forth our objectives and expectations, and we were able to blow that right out of the water," says Miesemer. "We handled a much higher volume in 2000 than we ever expected the building could do."

The building has 40 feet of vertical clearance and is racked seven high, double deep. Of its 1.2 million square feet of space, 165,000 are dedicated to a co-pack operation. There are two identical "pick tunnels" for less-than-pallet quantities, and a total of 165,000 pallet positions in the facility. Comparatively, EDC I and EDC II provide 120,000 pallet positions in their combined 1.1 million square feet of space.

There are 160 dock doors, with 80 feet of interior dock space - enough to stage and configure full loads at each dock location. Approximately 500 Power Logistics employees now work the facility; when it's at full strength, 300 people will work the warehouse side, 350 will co-pack. The workers are cross-trained for either function. Employees count each load before the trailer is locked and sealed.

The number of dock doors enables the company to work ahead of a given day's schedule, says Miesemer. "If we're caught up on Tuesday but know that Friday is going to be a big day, we can go ahead and start staging loads and getting them ready to go and not worry about running out of doors," he says. "Normally we have a good three days' worth of orders in the system."

Here's how it works. An order comes into the SAP system either from an EDI transmission from a customer or a field sales representative and goes through an order block process, which examines the order for errors or omissions and runs a credit check on the buyer. Blocked orders require human intervention, while SAP books the cleared orders, allocates the inventory through an available-to-promise logic, issues a delivery note for cleared orders and sends the note on to transportation management, or TM.

Often, many individual buyers from the same customer may be involved - a grocery buyer, a candy buyer and an end-aisle specialty buyer, for example - so TM combines into a shipment those delivery notes from the same company that have the same delivery date and destination. TM notifies via EDI transmission one of the core carriers of the transport need, and the carrier either accepts or rejects the shipment. Ninety-six per cent are accepted, at which point the carrier makes the necessary appointments with the customer and passes an EDI transmission with that information back to TM, which in turns passes it to SAP. The order then is handed off to the WMS, which views it from a standpoint of picking sequence and figures out how to route the people in the organization through the building. They pick the order, stage it, notify the WMS, and the document returns to TM. System updates occur to SAP as the order is picked up and delivered, at which point the order becomes an invoice and a receivable.

Though reluctant to share specific numbers, Hershey clearly is delighted with the extensive co-pack capabilities at EDC III. "In the past we use to bring the product into a warehouse, then ship it off site to a co-packer, who would create these displays, load them on a truck and ship them back to us - a process that involves a lot of extra logistics cost and a much higher potential for damage," says Miesemer. "Now we do that under one roof, and we have much more flexibility because we have the stock here."

Atlanta Bonded Warehouse Company, which operates the new Atlanta distribution center for Hershey, also uses McHugh's DM+ product. GENCO will run the new distribution center in Southern California with DM+. Exel currently operates EDC I and EDC II using its homegrown WMS, but Hershey intends to evaluate a shift to McHugh at all of its facilities, Menicheschi says. "Before we retrofit these operations, we need to be sure we can recover the value from our investment," he adds.