Campbell's recipe for savings

Campbell Soup has revitalized its distribution program and realized seven-figure savings by tailoring its prices to the cost of serving each customer.

By James Aaron Cooke -- Logistics Management, 3/1/2000

If you want to change someone's behavior, offer a reward--that advice holds true for trading partners as well as for individuals. Just ask Campbell Soup Co. The well-known grocery-products company has implemented a program that offers pricing incentives to customers to develop practices that reduce Campbell's distribution costs. The result? Savings that run into the seven figures.

What prompted this program? "We wanted to reward greater efficiency throughout the grocery supply chain," answers Nicholas Bova, vice president for supply chain planning and logistics at Campbell. "We identified the activities that drive up costs. We then offered incentives to customers to order more efficiently and engage in electronic ordering and efficient unloading as well as to buy full truckloads and full palletloads of products."

The strategic pricing program, as it's termed, has netted several million dollars in savings for Campbell and its trading partners. "We're filling orders in the optimal way," reports Larry Venturelli, director of supply chain finance and customer logistics at Campbell, "and that's generating savings for us and for our trading partners."

Determining Actual Costs

Based in Camden, N.J., the Campbell Soup Co. makes juices and sauces as well as the familiar red-and-white labeled cans of condensed soup. Last year, the company reported about $6.4 billion in sales.

As a general rule, Campbell ships its product directly to U.S. retailers and grocery wholesalers from four plants located in Paris, Texas; Napoleon, Ohio; Sacramento, Calif.; and Maxton, N.C. Campbell distributes its product via for-hire motor carriers to about 600 customers and more than 1,800 ship-to locations in this country. It shipped approximately 5.5 billion pounds of soups, sauces, and beverages in the United States last year.

Two years ago, the company began looking for ways to reduce its supply chain costs. Managers examined the operation, using the activity-based-costing accounting method to establish the actual expense for specific logistics tasks. They identified factors such as pallet configuration, pallet type, shipment size, carrier unloading, and cash management practices that had a high impact on distribution costs. They concluded that customers that didn't order electronically and that ordered cases delivered via less-than-truckload transport were more costly to service than their counterparts that had automated their ordering procedures and ordered in truckload quantities.

In response, company executives decided to institute a strategic pricing program that would provide financial incentives for its domestic customers to order product in full truckloads and in full pallets rather than in cases. "Strategic pricing's intent was to provide incentives to trading partners to increase efficiency within the existing supply chain," says Bova. "Based on their ordering pattern and the way the customers ordered product from us, they got a price reduction."

Campbell rolled out its new pricing program in phases, starting in the summer of 1998. The program covered the company's full range of soups, sauces, and juice products, excluding only its Pepperidge Farm division and restaurant service products. The menu pricing program, as it's known, offers Campbell's customers a menu of pricing options--that is, the choice of adopting certain practices and earning price reductions, maintaining their existing prices, or paying a higher price for additional services.

Customer orders get assigned to pricing brackets based on the cost Campbell incurs to service them. "If they order a certain percentage in full truckloads and full pallets, they qualify for different brackets," says Bova. "We also give them parameters around product unloading as well as electronic ordering and invoicing. In addition, customers are given allowances or price breaks for picking up the goods themselves and/or accepting direct plant delivery."

Campbell also requires its customers to participate in the CHEP USA pallet-pooling program. CHEP, which has its U.S. headquarters in Orlando, Fla., rents out pallets used for transport, thereby ensuring pallet quality and eliminating pallet return issues. Although Campbell requires its customers to use CHEP pallets, the soup manufacturer pays most of the rental and issuance fee. "The only real cost to the customer is moving the pallets from its location to the CHEP depot," says Venturelli, who's responsible for developing and implementing the company's menu pricing program. Currently, 99 percent of Campbell's customers use CHEP's services.

Rewards for Better Behavior

In the first six months of the program's operation, Campbell witnessed a significant change in its customers' buying practices. When the company launched the strategic pricing initiative, about 18 percent of Campbell's customers qualified for the best pricing bracket. Today, more than two-thirds of its customers meet the criteria for price discounts. "The general trend has been toward more compliance, with people moving into the better brackets," Bova reports.

The program has enhanced the efficiency of Campbell's distribution operation. For one thing, the company now can consolidate more orders into full truckloads. Today, more than 90 percent of its domestic volume is ordered in full truckloads compared with 70 to 75 percent when the strategic pricing initiative got under way. In addition, 85 to 90 percent of the volume moves on full pallets today compared with 70 percent in the past. On top of that, Campbell exchanges electronic purchase orders and inventory information with about 90 percent of its customers as opposed to 60 to 65 percent of them when the program began.

Filling customer orders in the optimal way allows Campbell to improve its customer service, reduce distribution expenses, and share the savings with its trading partners. It now has fewer personnel and pays less overtime in its warehouse operation than in the past even though productivity has soared.

Campbell has been able to put into effect a three-day processing time for standard orders from trading partners and a two-day turnaround for customers in its continuous-replenishment program. "If we move goods on full pallets, we have less handling," says Venturelli. "It shortens the amount of time it takes to fill an order. Because there's less handling, damage is reduced throughout the supply chain."

Although Campbell won't specify the exact amount of dollar savings realized, Venturelli does note that the savings have reached the seven figures, with a majority of that realized by the customer. "Even customers that were reluctant to participate initially have realized over time that the benefits they've received far exceed any costs they may have incurred," he reports.

Despite the program's success, Campbell is examining other ways to wring more savings from its supply chain by promoting other efficient logistics practices. One of those might be quicker order turnaround for those customers that participate in a Continuous Planning, Forecasting, and Replenishment (CPFR) program with Campbell. The CPFR movement is gaining ground in the grocery trade because it allows a manufacturer to determine its stock replenishment quantities in concert with the retailer and thereby remove redundant inventory.

Campbell is also considering a "no-touch" delivery program in which the truck driver would no longer be responsible for unloading the trailer. The customer would have to ensure that personnel at the receiving warehouse were available to unload the truck. Because most customers are getting full truckloads, Bova notes that it should take customers less time to sort and segregate products.

None of those plans is final yet. Bova says the company will have to weigh the benefits and costs before making any decision. "We're probably looking at diminishing marginal returns from these sorts of incentive pricing programs because we've got great compliance already," he notes. "If we add something, we won't get the results we got initially. With the amount of effort to roll out a second wave of incentive pricing, the level of benefits may be much lower."

Supply Chain Benefits

By motivating the customer to place more efficient orders, Bova says, Campbell has realized major savings. But Campbell isn't the only party that has realized benefits: Both the manufacturer and its trading partners have improved their distribution and order-handling practices, lowered transportation costs, upgraded warehouse and store service levels, and reduced administrative support.

When the grocery store gets a lower price per case, it can reduce the product price to make it more attractive to cost-conscious consumers. "Not only are we generating savings, but we're holding the shelf price a little better," Bova says. "We have taken costs out of our supply chain, and our customers can--if they want--lower the overall shelf price. Ultimately, the consumer pays a lower price and gets a better value."