How Small Food Distributors Can Reclaim Control oftheir Business: The Surprising Outsourcing Solution By
IntroductionFood and beverage distribution companies are the lifeblood of society. Without the efficientopperation of thousands of food distributors, their partners, sales people, warehouse personnel,route drivers, equipment, quality control and information technology, wed go hungry. Literally.However, food distributors have to battle against lower margins, competitive pressure, high fuelcosts, changing consumer patterns and the current economic environment.Things are hard for Americas food distributors.Information technology solutions, such as reporting software and mobile hand-held systems,implemented as part of a well-planned strategy to increase visibility into their business, makefood distributors more responsive to their customers, and decrease billing cycles, can provide aviable solution to some of the above problems, but implementation can sometimes prove to bevery costly, especially for smaller locally-owned distributors.These same technology solutions can also be very rigid, making customization to the particularneeds of each distributor even more costly and complex.However, there is some light at the end of the tunnel. Americas small and medium fooddistributors, and their technology providers, can now take advantage of a new type of outsourcingboom to cut costs while implementing sophisticated technology solutions normally reserved foronly the largest companies.When the word "outsourcing" is mentioned, this conjures up images of projects sent to India, thePhilippines, Russia or the Ukraine, the late-night hours, language barriers, project overruns, andmisunderstandings which have been the source of legendary project failures.Smaller companies and their technology providers have naturally become reluctant to evenconsider outsourcing, believing it requires the resources of really large companies with well-staffed IT departments and full-time CIOs to oversee and manage.This couldnt be further from the truth.Costa Rica, traditionally known as the small Central American country with beautiful beaches anda cost-effective destination for American retirees, has emerged as an outsourcing powerhousethat offers many advantages for small and medium-sized U.S. companies wanting to implementsophisticated customized information technology solutions that up till now have been out of theirreach.The goal of this special report is to explore some of the industry trends affecting small andmedium-sized food distribution companies, discuss the new Costa Rican outsourcing trend as asolution to this challenge, and invite food distribution CEOs and their information technologypartners to actively explore this opportunity.
Industry Trends Affecting Americas Food DistributorsFood distributors face several issues that have made it harder to make a profit, increasemarketshare, and beat their competition.1. Higher Transportation CostsThough fuel costs have leveled-off since their highs in 2008, they are still much higher than theywere during most of the 2000s. High fuel costs have contributed to the increase in foodtransportation costs. Food costs have gone up as well, but not at the same rate as fuel costs,putting increasing margin pressure on food distributors.2. Changing DemographicsThe baby boom generation is getting older and demanding more convenience. The growth of newgenerations who lack the talent to cook has also increased the demand for prepared foods. Fooddistribution companies now have more UPCs to manage and sell. Keeping track of these items andensuring maximum market participation in each category also adds to the cost and complexityexperienced by food distributors.3. Increased GlobalizationContributing to the increase in food diversity and complexity is the shrinking of global marketsdue to globalization. This has increased food diversity and added to food flavors and textures,making the merchandising job at the point-of-purchase more complex.4. Increased CompetitionDue to a tight labor market up till a few years ago, and increasing mergers and acquisitions,competitive pressure has been growing, driving down margins and forcing manufacturers,distributors and retailers to become more efficient.5. Food SafetyRecent food safety scandals and the threat of bio-terrorism has imposed increased regulatorypressure on the food industry. Food traceability standards have emerged as the industry solution,and this has also contributed to the complexity and cost of the food supply chain.6. The Downturn in the EconomyConsumer shopping habits have changed dramatically over the last two years due to the downturnin the economy. According to a 2009 study by the Information Resources, Inc. entitled "Times &
Trends: A Snapshot of Trends Shaping the CPG and Retail Industries," 83% of shoppers nowdecide what theyre going to purchase before visiting the store, up from 60% in 2007. Priceconsciousness and coupon clipping, especially amongst millennials (those 30 years and younger),have also gone up, and theyre making more frequent, shorter trips to the store. These consumershopping changes have motivated manufacturers to collaborate more closely with retailers, anddistributors have to become involved in this collaboration or risk redundancy.Managing These Trends: The Distributors Need for DataThe above changes have made it necessary for distributors to leverage technology to give theminsights into every aspect of their business. However, not only should distributors have an insightinto every aspect of their business, but they need to have insight into whats going on at the retaillevel, and share information with the manufacturers they represent.Food distribution companies are often family-owned businesses that have been in business manyyears, and may have even been passed on from one generation to the next. Here are a fewattributes of traditional distributors that could be impacted by information technology:1. Two-tier Distribution ModelMany food distributors use a two-tier distribution model. They serve as the master distributor fora CPG brand for a given territory, such as a metropolitan area or a rural area, and then theyassign routes to independently owned sub-contractors or micro-distributors who may own adelivery van or a small fleet. These master distributors are often at the mercy of their sub-contractors regarding sales information and activity at the store and consumer level. Theincreasing need for collaboration between CPG companies, their distributors, and the retailers toperform product marketing, customer marketing and in-store merchandising is requiringdistributors to implement information technology processes to know whats going on at the retaillevel in order to control activity at the point-of-purchase and provide data to the manufacturer.2. Manual Back Office ProceduresMost distribution companies have some type of ERP or accounting system that is either specializedfor the food distribution industry, or has been customized. However, there are still many manualprocesses, such as data entry for orders brought in on note pads by route drivers, printing ofinventory reports, pricing pages, and invoices, and the creation of Excel spreadsheets thatprovides limited data on sales and profitability. Most distributors know these processes could beautomated with hand-held devices and configurable reporting tools, and are aware of the need tohave detailed data on route efficiency, UPC performance and inventory turns, detailed cost andexpense analysis, and sales analysis per retail outlet, route driver and UPC. However, they haveeither been deterred from implementing them due to the high cost involved, or due to thecomplexity in implementing a solution, not to mention the lack of an IT department.3. Unique Business ProcessesEven when food distributors decide to embark on a technology upgrade they often find currentlyavailable systems are inflexible and costly to customize. Many of the thousands of fooddistributors across the United States are independently owned and operated businesses andoperate their own unique business processes. Business owners are often frustrated when theyattempt to implement pre-canned solutions that dont quite fit their particular needs.
Increasing Control and Visibility with Mobile Solutions andManagement DashboardsTo have full control over their distribution system, enable quicker response to the needs of theirretailer customers as well as consumers, and to provide valuable operational and market insightfor management as well as to their food manufacturing partners, small and medium-sized fooddistributors should implement a mobile solution combined with a reporting or business intelligencesystem.1. Increasing Visibility and Performance Across the Supply ChainBy implementing a mobile solution that is connected in real-time to the companys back officesystems, food distributors can increase their visibility and control of the supply chain, and sharethe data with their food manufacturing vendor/partners. Mobile devices in the hands of routedrivers: • Provides instant feedback from the point-of-purchase that is immediately synchronized with the companys ERP or accounting system. • Provides route drivers with the list of customers they have to visit that day. • Allows route drivers to issue invoices on the spot, saving time and effort creating invoices and stuffing envelopes. • Enables last-minute route changes to be transmitted from headquarters to route drivers. • Allows route drivers access to the product catalog, allowing them to cross-sell and up-sell at the point-of-purchase.And many other benefits. You can probably think of dozens of additional functions that can beperformed with the use of hand-held devices.2. Data to Feed Daily Business DecisionsBy implementing reports or management dashboards to make sense of the enormous increase inadditional data points collected via these mobile devices, management now has access toactionable information so they can make daily, weekly and monthly decisions to increase sales,take advantage of new market opportunities, get rid of poor performing brands, improve routedriver performance, increase market share and increase profitability.Here are examples of data points managers can start to track with management dashboards: • Sales per product line. • Sales per route. • Sales per store, restaurant, hotel, snack bar. • Performance of point-of-purchase displays. • Slow moving inventory. • Popular items. • Market threats.However, according to John Schiaroli of warehouse management consulting company The BeltechGroup, only about 20% of food distribution companies have implemented a system like this.Schiaroli said that although small and medium-sized food distribution companies are increasingtheir adoption of these types of solutions, the high cost of implementation has kept the majority
of smaller local and regional companies from taking action.Outsourcing to Costa Rica: The Surprising Solution for Small andMedium Distributors and their Technology PartnersAs mentioned earlier, the word "outsourcing" can strike terror into the hearts of small businessowners in America. Horror stories from companies that have outsourced to companies in overseasare legendary.Some of the drawbacks to overseas outsourcing are: • Mismatched time-zones. Companies in Russia, India or The Far East range in time difference from 9 to 16 hours which makes for many sleepless nights on conference calls with the overseas development team. • Differences in culture. Differences in culture often lead to difficulties. U.S. companies typically are looking for more than just a body shop: theyre looking for expertise and opinions. Some cultures have an aversion to saying "no" or providing conflicting opinions, and a "yes" can sometimes mean a "no," which can be confusing to American companies. • Communications difficulties. Often when outsourcing to overseas providers language barriers present communications difficulties. Project requirements are either not understood accurately by the outsourcing provider, or the U.S. company will find it hard to understand what is being asked of them, leading to project delays and and work that is not what the company expected. • Long distances. American companies wanting to supervise and meet their overseas development team often have to travel great distances to meet their overseas outsourcer. 10-18 hour airplane trips are typical, making travel an all-day affair. Overseas travel is also very cost-prohibitive. • Offshore outsourcing best suited for large companies. Many U.S. companies have ended their outsourcing adventures in Asia or Eastern Europe because they were either a small fish in a big pond, or the cost involved managing the overseas team was best suited for a larger company.Costa Rica: Nearshore Alternative or Heaven on Earth?All joking aside, Costa Rica has been on the upswing for a while now amongst many Americanretirees hoping to live the last years of their lives in an affordable paradise.However, over the last ten years Costa Rica has been quietly making a name for itself in anotherarea: as a technology outsourcing powerhouse.Known as the happiest place on earth according to the World Database of Happiness, Costa Ricahas quickly become the best place for American companies to outsource software development. Itis also an ideal place for small and medium-sized U.S. companies, including food distributioncompanies.Top 5 Reasons Why to Outsource to Costa Rica1. Costa Rica is a Top Producer of Software in the RegionAccording to a May 25, 2009 article in nacion.com(http://www.nacion.com/ln_ee/2009/mayo/25/economia1969584.html), Costa Rica is the 2ndlargest exporter of software in Latin America, after Uruguay. Costa Ricas educational system
develops talented bi-lingual engineering talent, serving as the intellectual brain power behindCosta Ricas 300 software firms that are now providing outsourcing services to the U.S., Jordan,South Africa and the U.K. Additional technical sitmuli have come with the opening of an Intel chipplant in 1998, where 20% of Intels chips are manufactured, as well as outsourcing centers by HP,IBM and other firms.2. Highly Educated WorkforceCosta Rica boasts some of Latin Americas most highly educated populations. After making thestrategic decision to disband the military and invest in education, Costa Rica has become anoutsourcing powerhouse not just in technology but for call centers and business processoutsourcing. A key dimension to Costa Ricas talented workforce is fluency in English, whichmakes for a smooth communications experience with American outsourcers.3. Cultural AffinityCosta Rica is a Western country, which increases cultural affinity with American customers. CostaRican engineers are not afraid to disagree with a client or to provide an opposing view orconstructive feedback, standard business practices in the United States. Costa Ricans grow upwith similar values, listening to the same music, and sharing many cultural similarities toAmericans.4. Same Time ZoneNo more sleepless nights, Costa Rica is in the Central Time Zone, just 1 hour behind the EasternSeaboard, and 2 hours ahead of the West Coast.5. Just 3 Hours AwayIt is always recommended to visit your outsourcing team before you hire them, and to drop inevery now and then to see how theyre progressing. This is especially important on longerprojects. Costa Rica is just a 3 hour plane ride away from most major airport hubs in the UnitedStates, making it an easy trip back and forth. But be careful: once you visit you may not want tocome back to the States!What Food Distributors Should Look For in a Costa RicanSoftware Outsourcing CompanyDespite the good news about Costa Rica, as in any market where there are lots of choices youneed a checklist to narrow down your choices. Small and medium food distribution companies andtheir U.S.-based technology partners should use the following criteria before choosing a softwaredevelopment outsourcing provider:1. Deep Food Industry ExpertiseBefore looking at technology expertise you should consider domain expertise. The company youchoose should not only have experience in the wholesale and food logistics industry, but also infood traceability, especially if you deal primarily in perishables. Traceability has become a majorissue in the United States, especially with recent food scares and the threat of bio-terrorism since9/11.2. Satisfied ClientsOutsourcing companies should have a list of satisfied clients, either in the U.S. or in their home
country. Look specifically for situations where company CEOs or Presidents are able to state ordocument, with confidence, real business value gained from the relationship with the outsourcer.3. Understanding of Business IssuesTechnology is never implemented for the sake of technology, and outsourcers should never bejust software developers. Look for a savvy outsourcing team that understands the businessimpacts of implementing strategic software solutions as a way to improve business performance.4. Bilingual Outsourcing TeamThe project manager and lead developer should be completely bilingual, as well as fluent inconversational and written English. This is a no exception requirement.5. Certified in the Latest Agile Development MethodologiesEveryone has heard of software projects gone bad. The typical scenario is a software developmentproject that was due to last 8 weeks, but turns into a 6 month project! This is due to old softwaredevelopment methodologies that are inflexible and require the complete solution to be mappedout before any work begins. When new requirements are introduced due to market forces or newideas, the system is too rigid to change and thus has to be re-architected from scratch. New"Agile" methodologies have arisen that are more flexible and produce results much sooner.However, there are many pretenders in the field. Look for companies that have certified ScrumMasters to ensure your Agile software development project is delivered accurately and on time.6. Expertise in Service-Oriented Architecture (SOA)Another important development in software development is the emergence of Service-OrientedArchitecture (SOA). This is a mindset that many software companies use when working in diversetechnology environments. Many small and medium food distributors already have some sort ofbusiness management system, such as QuickBooks, Microsoft Dynamics Nav, Solomon, GreatPlains or AX, SAP Business One, Mas-90 or other proprietary systems or custom built solutions.SOA utilizes flexible web technologies to connect to a diverse array of sytems to re-use theirfunctionality in new ways, instead of throwing out the old and replacing them with completely newones.7. Certified in your Preferred Technology StackMany small and medium-sized food distribution companies have standardized on Microsofttechnology, such as the Microsoft Dynamics Suite, or by the use of Outlook as the company emailsystem, Windows as the company operating system, and custom built applications using C orC++. As such, its important to work with an outsourcing company that is a Microsoft CertifiedDevelopment Partner.8. Partner that is the Right SizeAs a rule of thumb, if your company is a Fortune 500 company, you should choose a large Global2000 outsourcing partner. If your company is a smaller firm, you will get lost in the shuffle andbecome just another small customer. You need to find a partner that fits your size so you cancommand the attention you require.ieSoft: Your Costa Rican Food Distribution Development PartnerCosta Rica has become like a supermarket of software outsourcing companies: too many choices.If you walk up and down the virtual aisles of software developers you will find many wonderful,
talented and enticing companies. However, this makes choosing the right partner for you verydifficult.Software outsourcer IeSoft has emerged as the go-to company in Costa Rica for the food industry,both in Latin America and the U.S.In business for for more than 6 years, IeSoft: • Has implemented mobile and business automation solutions at 8 of Costa Ricas top food distribution companies. • Has built traceability systems for several agricultural processing firms. • Develops software under the agile SCRUM methodology, with personnel who are certified Scrum Masters. • Is a Microsoft Certified Development Partner. • Has a completely bi-lingual project team. • Some of their clients have received international awards for the systems they developed for them. • Is a small and very focused company, enabling them to provide excellent one-on-one attention to U.S. food distribution companies or their U.S. technology providers. • Are experts in SOA, having integrated business automation solutions with their customers older proprietary custom-built systems. • Is one of the founding members of the IT Innovation Group (http://itingroup.wordpress.com/), a consortium of Costa Rican software companies, sponsored by the Costa Rican IT Chamber of Commerce (CAMTIC) and the Costa Rican export promotion department (PROCOMER), whose purpose is to research, create and market innovative technhologies.Case Study: Urban Distributors of Snack FoodsOn of Latin Americas largest snack food and tortilla manufacturing companies, Gruma(manufacturers of Mission Tortillas in the United States), wanted more visibility and control of theretail sales process. They mandated their major distributors in Costa Rica implement a businessintelligence and mobile sales force automation solution.Two of their largest distributors in San Jose, Costa Ricas capital and a major metropolitan area,led the way for the companys 8 distributors nationwide.
Grumas largest distributor, Joma S.A., for example, was making daily deliveries to 5,000 grocerystores, supermarkets such as Wal-Mart, convenience stores, restaurants and fast food places suchas Burger King and Taco Bell, through a network of 40 route drivers. Each one of the route driverswas an independently owned micro-business that delivered food in different areas of the city or inthe surrounding areas.Grumas distributors had about a 90% market share in Costa Rica, but smaller suppliers werekeeping them from growing, and some were making inroads into their market. Additionally, inorder to keep growing, profit margins had to improve, and management at these companies hadrun out of creative ways to improve profitability.Respond to Customer Needs and Gather Data with Mobile TechnologyJoma S.A., and fellow San Jose distributor Oro Blanco, realized the only way to increase sales andprofitability, as well as to provide the information Gruma needed, was to have tighter control overthe relationship with their own customers (the stores and restaurants) via the use of technology.This required daily information at the point of sale such as returns, sales, performance ofindividual brands, promotional displays, stores and route drivers, and it also required on-the-spotinvoicing to increase cash flow due to faster collections, as well as to free up resources atcompany headquarters.The companies did an extensive search for the right company to implement this solution, andfound IeSoft. Due to IeSofts knowledge of the food industry, its traceability experience,flexibility, SOA and agile experience, they were the ideal technology partner.IeSoft built a mobile sales force system that enabled the companies to issue their route-driversiPaq 256 pocket computers along with Zebra MZ 320 mobile printing devices. This system allowedroute drivers to: • Check which list of clients to visit that day, instead of manually printing out a list. • Record inventory at clients location as well as expired product for returns, allowing management to make timely strategic decisions on product placement on a store-by-store basis. • Generate invoices on-the-spot, eliminating the need for headquarters personnel to create and send invoices. • See sales-to-date, returns, visits, and performance vs. quota, providing route drivers and their supervisors essential information on job performance.Management Dashboards to Improve Management Insight into the BusinessRoute drivers returned to the warehouse by 2pm, at which time all the data such as invoicesissued, products returned, customers visited and other important data points was synchronizedwith the companies management systems and immediately fed into a management dashboard foruse by company executives.The dashboards gave executives at the distribution companies a daily snapshot of their business,starting at 3pm, 1 hour after the last route driver returned.Managers were able to:1. Set objectives.
The system allowed management to set yearly, monthly and daily goals and measure dailymonthly and yearly performance against these goals.2. Analyze sales performance.The management dashboards gave the companies insights into as many details as possibleregarding performance, such as sales per route driver, sales per brand, sales per customer,performance of particular promotions or point-of-purchase displays, and performance vs. thecompetition.3. Data across the supply chainThe systems built by IeSoft allowed the distributors to see exactly what was going on at the point-of-purchase: what stores, restaurants, or snack bars received less frequent visits, which ones onlyordered one or two items vs. the whole product line, performance of point-of-purchase displays,and performance vis-a-vis the competition.The insights gained allowed managers to increase control over aspects of their business theypreviously had no control over, by allowing them to make daily decisions such as what customersindividual route drivers needed to visit more frequently, how to increase sales of different brands,and how to improve point-of-purchase promotions.Additionally, they were able to share this data with Gruma, enabling them to utilize the data forfurther product development and product marketing.The system was eventually implemented at all 8 of Grumas distributors in Costa Rica.Joma S.A. was so successful they were named winner of "The Bizz Awards 2009" in Costa Rica byHouston-based World Confederation of Businesses, in recognition of their innovative solution.
Your Next Step: Your Personalized Assessment • Do you feel you dont have enough information about whats going on in your business on a daily basis? • Would you like to make your company more efficient and more responsive to your customers needs? • Would you like to invoice your customers sooner? • Empower your sales people to make intelligent up-sell or cross-sell recommendations? • Do you want to provide your vendors and customers with information that can help them market their products more effectively? • Do you want to implement a mobile salesforce solution, but havent because you think its too expensive? Find out how your company could benefit from a free personalized assessment of your company, its market, your product mix, and your technology environment by calling IeSoft for a personalized assessment of your companys next steps. This is a no obligation 30 min. to 1 hour assessment of your companys situation, and the end-result will be a detailed roadmap on how your company can implement mobile and business intelligence technologies to take your business to the next level. Call: (506) 2283-8282 Or follow-us on Twitter: @iesoft Facebook: ieSoft