The coronavirus pandemic forever changed how consumers interact with retailers. Omnichannel retailing provided a host of shopping options for customers, with e-commerce becoming a popular retail channel for many as they sheltered in place for weeks or months. As the country normalizes, e-commerce is poised to remain a dominant retail channel going forward.
What does this mean for cold chain consumer packaged goods (CPG) manufacturers? With many cold chain CPG companies encountering severe supply shortages during the initial months of the pandemic, now is the time to capitalize on omnichannel trends. To ensure supply where and when it’s needed—regardless of retail channel—a hub and spoke distribution model can benefit cold chain CPG manufacturers on several fronts.
While food shortages affected brick and mortar and online marketplaces for weeks, frozen foods were highly coveted for their extended shelf life. According to the report “Power of Frozen 2021,” published by the American Frozen Food Institute (AFFI) and The Food Industry Association (FIA), as consumers turned to online shopping at a record rate, the vast majority were adding frozen to their digital cart. Frozen foods generated $65.1 billion in retail sales in 2020, a 21% increase from 2019.
Over the past year, the report states 42% of households that buy frozen foods have bought frozen foods online, up from 23% in 2018. Online frozen food dollar sales increased 75% in 2020, with frozen dinners/entrees, meat, poultry, and seafood being the biggest online sellers.
How could this affect cold storage capacity? AFFI reports that the total capacity of refrigerated warehouses worldwide was 719 million cubic meters in 2020. The United States, at 156 million cubic meters, was the single-largest country market, followed by India at 150 million cubic meters and China at 131 million cubic meters. AFFI’s data shows the U.S. cold chain capacity has grown roughly 3.8% annually from 2010-2020.
The demand for cold storage facilities is only expected to grow. Research and Markets projects global cold storage construction to reach US$19 billion by 2027, compared to the estimated US$7.9 billion in 2020, a CAGR of 13.4%.
How might the pandemic affect operational strategies of cold chain CPG manufacturers?
The stress test that cold chain CPG manufacturers experienced during 2020 revealed opportunities for supply chain adjustment as a new normal emerges in retail. The following provides areas CPG companies should focus on (short term and long term) as they emerge from the pandemic and toward a level of business normality.
• Evolution of retail. The retail industry’s shift to online buying is unlikely to decline as the country emerges from the pandemic. According to Boston Consulting Group, companies in the CPG space need to “evolve organizational, product, and marketing capabilities to capture growth in channels, such as value and e-commerce, that are increasingly attractive to consumers.” CPG companies must adapt to a full-scale omnichannel retailing landscape where brick and mortar is only one of several buying options for consumers.
• Simplified SKU variation. Retail shelf space is limited. Using data to understand your product demand maximizes shelf space utilization and profitability. Is it relevant to offer 10 varieties of frozen dinners when only five sell consistently? In its report “A shock to the food system: Lessons learned from the COVID-19 pandemic,” Deloitte says, “Whereas in the past, the ability to provide product variety to meet every segment’s unique preference was viewed as a source of competitive advantage, the pandemic has demonstrated that a simpler SKU mix allowed for more nimble and efficient production and distribution.” However, as things get back to somewhat normal, it’s expected that SKU proliferation will once again increase.
• Warehouse automation. Automation is critical to achieving an agile warehouse. Cold chain CPG companies that utilize a warehouse management system (WMS) and leverage automation can optimize fulfillment and distribution operations by gaining higher throughputs and managing demand. Deloitte’s report states, “Despite the focus on efficiency within the system as a whole, there is room for increased efficiency driven by standardization and automation. Automated warehouses can more easily pivot to prioritize products in high demand.”
• Operational resilience. During the pandemic, CPG manufacturers that collaborated with their supply partners through data transparency and resource sharing responded more proactively to changing demand conditions. Understanding demand from tier-2 and tier-3 suppliers provided strategic insights into inventory levels of critical raw materials. According to Deloitte’s report, “Maintaining transparent and integrated partnerships is critical to sustaining a well-functioning and agile food value chain. To enable this, companies may turn to integrating select suppliers and distributors into a more coordinated sales and operations planning. Increasing transparency between partners and aligning on performance tracking are some of the mechanisms that have shown high effectiveness.”
Ultimately, cold chain CPG manufacturers must adapt to omnichannel demand and operate as an integrated value chain with their supply partners.
Matthew Ott, president and CEO of the Global Cold Chain Alliance, says, “The key here is flexibility. Our members, who are involved in every aspect of the distribution and storage of perishable goods, have worked collaboratively with their CPG partners to ensure that safe, high-quality goods reach their final point of delivery,” says Ott.
“From the start of the pandemic, 3PL companies immediately stepped up to the challenge of changing consumer demands, investing in new technology and other upgrades to improve their ability to serve retail, foodservice, e-commerce, and beyond,” says Ott.
A hub and spoke distribution model is well-designed to meet cold chain omnichannel demand while providing a centralized, regional distribution network, shortening the supply chain and reaching last-mile customers quickly and efficiently.
There are several benefits to hub and spoke distribution.
• Productivity gains. Bulk loads leave the hub, reducing the number of trucks required in the network.
• Reduced inventory costs. With the hub holding the majority of inventory, the spokes can operate a just-in-time inventory model, keeping inventory costs lower.
• Efficient shipping. Because the spokes (smaller DCs, retailers, end customers) are closer in proximity to the hub, transportation costs are lower and delivery speed is accelerated.
For a cold chain CPG manufacturer, these benefits are critical to temperature-sensitive products with daily or high-frequency replenishment. Hub and spoke provides the supply chain flexibility and responsiveness to volatility that CPG companies require to be competitive.
Coupling the hub and spokes with leading-edge automation, CPG companies ensure that omnichannel orders are fulfilled quickly and efficiently.
Even prior to the coronavirus pandemic, SSI SCHAEFER was tracking the trend of increased e-commerce adoption as consumers shifted toward click and ship or click and pick models.
Fulfillment of click-based orders prompted a review of cold chain distribution strategies. A model with smaller, local facilities designed with automation provides higher throughput, faster replenishment for brick and mortar retailers, and fulfillment of e-commerce orders. These facilities can also scale as business grows.
What does cold storage automation look like for a hub and spokes?
Hub. Because the hub is the central point of inbound/outbound deliveries, it’s a large facility with several key advantages for automation:
• Energy savings
• Advanced workflows
• Scalability as more SKUs added.
These cold storage facilities are fully automated to accommodate a variety of product types with various temperature requirements from refrigerated to freezing. Automated equipment is designed to withstand harsh conditions of deep freezers while limiting human exposure.
Furthermore, cold chain products are typically products that need the utmost of care when it comes to picking—meaning that error-free picking is a must. Expiration date and lot number tracking within the automated system guarantees that each order is picked correctly. Fully automated solutions provide the accuracy and trace and tracking required for a cold storage hub facility.
A high bay warehouse provides the ideal automated solution for cold storage hubs. The single-, double-, or multi-deep racking system, combined with storage and retrieval machines (SRMs), provides dense storage in a small footprint. These 40-foot to 148-foot-high structures can store thousands to hundreds of thousands of pallets.
With a cold chain hub receiving product for omnichannel fulfillment, the speed and efficiency of a high bay warehouse are unmatched.
For hub structures with height restrictions, shuttle systems designed for heavy loads are an excellent substitute for a high bay warehouse. Shuttle systems are ideal for medium to large number of SKUs where dense storage and high throughput is required. Shuttle systems also limit human exposure to harsh conditions.
Spokes. As the spokes to the hub, these smaller facilities are nearer the end customer. Facilities could be DCs, warehouses, retailers, or convenience stores. With a smaller footprint, spokes can be semi- or fully automated.
For pallet storage, both mobile racking systems and channel storage can be ideal depending on the product mix. A mobile racking system is an efficient solution for small- to medium-sized areas where high-density storage is required. It also serves as a solution for freezer environments for quick visibility and storage capacity. Since freezer space is more expensive than ambient, it makes sense to go with a technology that creates additional storage by limiting the requirement for aisle space.
For channel storage, pallet shuttles operate within the channels performing storage and retrieval tasks. Channel storage provides high-density storage capabilities for lower SKU counts. This type of system is well-suited for large volumes of minimum SKUs. It can also be used to stage inventory in front of the shipping dock for efficient trailer loading.
With less inventory at spoke facilities, storage retrieval machines built for more compact loads using cases, bins, or cartons are also an option. This type of automated shuttle solution is valuable for cold storage facilities that perform mixed case storage and picking for various retail or other businesses. Another benefit of shuttle systems is the ability to handle multi-deep storage units in deep-freeze environments.
CPG companies have several options for automating their hub and spoke facilities—including partnering with a 3PL that has such a vast network in place. Ultimately, having product closer to the customer provides a level of risk mitigation for any possible disruptions, while also meeting product and delivery demands of their valued consumers.