Case Study: Land O'Lakes and Collaborative Logistics - ' Strategy Shift '

Strategy Shift

But for Land O'Lakes, using collaborative logistics to find new savings has been particularly urgent. The nation's third-largest seller of branded dairy foods ran into trouble last year in every major area of operations. Sales fell $712 million from the previous year, to $5.8 billion, partly due to smaller markets for branded dairy products as a result of the souring economy. Land O'Lakes also is saddled with debt from its 2001 acquisition of Purina Mills, the St. Louis-based company it bought to boost its clout in the highly competitive feed business.

Another factor is the long shadow of Wal-Mart Stores Inc., which is marching further into the grocery business. Wal-Mart's renowned distribution system includes super-efficient regional distribution centers across the country, where trucks bringing goods in and taking them out can simply "cross-dock" without hav-ing to stash a lot of inventory in a holding area. Land O'Lakes and its rivals, therefore, must be able to accommodate Wal-Mart's demanding schedules by having trucks show up exactly when they're due. "You want to make sure," Johnson says, "that you take care of Wal-Mart."

But most pressing of all may be Land O'Lakes CEO John E. Gherty's new internal "Fit to Compete" program, a push begun earlier this year to bolster the co-op's internal efficiencies to cut costs, boost market share and shore up sagging sales. Land O'Lakes' farmer owners are insisting the dairy foods co-op play harder against the big guys—direct rivals Dean Foods Co. and Kraft Foods Inc., among them.

Land O'Lakes has to compete for space in the refrigerated case with these giants, which throw their weight around using their size, clout and relationships with supermarket retailers, paying slotting allowances and engaging in other practices that make the fight for grocery-store real estate a brutal one, says David Phillips, editor of Dairy Foods, a Chicago-based industry publication. "They're all having a hard time right now because the price of cheese has dropped and new players have come in, the price of milk has dropped, and the market appears saturated," Phillips says.

Meanwhile, the grocery business is consolidating. Fewer, bigger players are dominating the landscape, including Wal-Mart, which is shaking up the natural order in grocery retailing with its immense purchasing power and huge mind share with American consumers. Wal-Mart's aggressive foray into grocery sales cannot be underestimated, analysts say. Grocery-only chains are consolidating nationwide as well, including huge conglomerates of former regional chains such as Dutch-owned Ahold USA. Historically, supermarket profit margins top out at 2 percent, and these developments are threatening to drag them even lower in the short term.

Against that backdrop, says Land O'Lakes' Johnson, collaborative logistics has been a step toward a more connected and real-time supply chain. "The Net, with its ability to track, in real time, various shipments and what's being loaded on which trucks at any given time, made sharing routes for savings seem like a no-brainer," he says.

How does the Nistevo network work? Nistevo's site continuously updates and consolidates information about routes, loads and schedules from members' in-house logistics scheduling systems. It's an impressive feat: Consider that on any weekday, Land O'Lakes alone has some 145 loads hauled by 20 different carriers, running on hundreds of regular routes. Only Nistevo sees the whole picture: "Land O'Lakes routes are not shown to General Mills, for example—but Nistevo sees where scheduling can occur, and does all the matching," says Johnson.

According to Johnson, the industry estimate is that 20 percent of the miles traveled by common carriers are "non-revenue miles"—in other words, miles traveled by empty trucks. Nistevo scans the millions of possible route configurations and route-load combinations to look for inefficiencies that could be solved by merging loads from different companies bound for the same destination.