Imperial Tobacco Canada transforms its distribution channel literally

Transportation and supply chainsolutions for the bottom linea Ryder System, Inc. publication

BusinessAsUnusual

Imperial TobaccoCanada transformsits distributionchannel literallyovernight.

RSC-467 Imperial Tobbaco EDGE_POD:RTR-833 EDGE Whirlpool RePrt_1 7/16/09 4:03 PM Page 2

hat if the government took away

your ability to market your retail

products? What if retailers couldn’t even

talk about your products or display them to

consumers before purchase?

Faced with large changes in the regulatory

environment, a natural reaction might be to

hunker down and make the best of a bad

situation. Imperial Tobacco Canada, Canada’s

leading tobacco company and a wholly-owned

indirect subsidiary of British AmericanTobacco

p.l.c. (BAT), took a different approach – the

company chose to fundamentally change its

distribution from a wholesaler-driven model to

an entirely in-house direct to store sales system.

Realizing that its success would rely on building

exceptional relationships with its retailers,

Imperial knew the best strategy was to have a

dedicated, state-of-the-art distribution system –

from warehouses to drivers – to ensure products

were always in stock and the retailers received

the best service possible.

W


At A Glance

Challenge

How to maintain market share,

when impeding Canadian

government regulations were going

to require Imperial’s products to no

longer be visible to consumers in a

retail store – consumer would have

to ask for them by name. Also,

accommodate a shift in production

from Canada to Mexico without

impacting customer service and

product availability.

Solution

An integrated North American

supply chain operation that links

tobacco fields, manufacturing

plants, warehouses and distribution

centers, from Mexico and across

Canada to individual retailers.

Benef i t s

Direct control of the retailer

experience and synchronized

production with demand.

Optimized working capital, cost

and customer service and Imperial

Tobacco Canada’s recognition by

retailers as having the best cus-

tomer service among consumer

goods companies in Canada.


Imperial Tobacco Canada was looking for the finest

retailer experience,” said Daniel Bergman, vice president

of Operations for Ryder. “When they touched the retailer,

they wanted to make a positive and lasting impression.”

Imperial had an existing network of 93 wholesalers

selling its products to more than 30,000 outlets. To

wholesalers, Imperial’s products were just some of the

thousands of items – like soft drinks and snack food –

that they sold to retailers. They were the only way to

get products in the stores. Imperial needed a better

means of distribution.

“We wanted to gain efficiency in delivering our

product,” said Robert Robitaille, vice president Supply

Chain-Canada for Imperial Tobacco Canada. “We also

wanted the ability to communicate directly with our

retailers.”

Within the BAT group, there were subsidiaries that

had successfully converted to a direct to store sales model,

most notably in Brazil, and in every instance, those

subsidiaries had gained market share through improving

customer service and optimizing the availability of product

in the stores. But none had to manage the complexity and

sheer scale that Imperial faced.

Making the transformation more difficultThe first challenge was the size and governmental

structure of the country. Canada is nearly 3.9 million

square miles (nearly 10 million square kilometers) making

it necessary to build a far-flung system of warehouses,

crossdocks and drivers. The country is also a confederation

of very independent provinces, which makes selling

tobacco products extremely complex.

“Due to the regulatory and tax environments,

each province is like a different country,” Robitaille said.

“The tax regimes and packaging are very different. For

every brand we represent, we sell ten variations of that

product. From a product and delivery point of view,

everything looks the same, but from a system standpoint,

everything is a different product. That’s why we have

over 1,000 SKUs.”

Second, Imperial moved its manufacturing from

Canada to Monterrey, Mexico, at virtually the same time.

Due to the decline of tobacco industry volume over the

years, Imperial Tobacco Canada needed a more cost-effective

way to manufacture their product. This move added one

more layer of complexity, lengthened its distribution system

by thousands of miles and required more systems inte-

gration to ensure an uninterrupted supply.

And finally, they had to take the entire system live

across the country literally overnight. Since confidentiality

was key, everything across Canada – new drivers, sales-

people, systems, trucks, handheld computers, distribution

centers, processes – was launched without the benefit

of parallel testing.

It became clear very quickly that to make such a com-

plex, strategic change, Imperial would need to enlist help.

Imperial Tobacco Canada converted its distribution from awholesaler-driven model to an entirely in-house direct to store sales system.


We put ourbest peopleto the issuesand Ryder’sopenness tooperate thisway made itwork.

Complete supply chain integrationImperial leveraged prior experience from other

markets to help the Canadian team plan a successful

direct to store sales transition. While gaining control over

its distribution to retailers was the primary goal, there

were other objectives Imperial wanted to meet:

�Building an integrated supply chain from the

tobacco fields in Canada to manufacturing in

Mexico to warehouses across Canada and finally

to the retailer;

�Building an information technology system

that would exchange data between Imperial’s

SAP system and warehouse management,

production, truckload, and supplier system

in real time;

�Implement an electronic collection process to

improve accounts receivables from almost 30

days to less than one.

It was apparent that Imperial needed a strong

partner to build and manage the new direct to store sales

system. Because Imperial already had a successful ten-

year relationship with Ryder to manage their three bulk

distribution centers, the decision was made to bring

Ryder onboard.


Building a direct to store sales systemOver the next six months, the players in place, quickly

and quietly, set about to define and build one of the most

complex direct to store sales networks ever devised, without

any disruption to ongoing operations in Canada. The

tasks included:

�Hiring and training a dedicated sales force of 300;

�Hiring and training customer service-oriented

delivery drivers;

�Building 6 warehouses and 14 cross docks;

�Building amulti-temperature controlled, state-of-the-art

warehouse to store manufactured products in Mexico;

�Building a logistics network to move tobacco from

Canada and the U.S. to Mexico for production, and

deliver finished product directly to each province in

Canada on a just-in-time basis;

�Hiring and training warehouse staff, and developing

an efficient picking and packing process;

�Procuring 218 vehicles for shipping and store

deliveries and equipping them with powerful security

systems to protect drivers and product.

Performance benchmarks, including units-per-labor-

hour picked (UPLH) and picking accuracy, were established

to measure the effectiveness of the distribution operations.

However, the most complex element of the new

operation was its IT system.

In addition to integrating SAP with the other

management systems, drivers were supplied with new

handheld computers to electronically confirm delivery,

record signatures and send data in real time to Imperial’s

SAP system via mobile phone networks. Not only would

the data from the mobile system deliver inventory and sales

data, but it was the key component to improving cash flow.

Retailers were encouraged to sign up for a new pre-approved

debit system, to automatically transfer payment upon

delivery confirmation via mobile signature capture.

“We have a very complex computer system where

everything is linked,” Robitaille said. “If there was a screw

up on the front end, it had ramifications all the way back

to our suppliers, which causes a huge ripple effect

throughout the supply chain.”

Because of the necessary low profile of the change,

it was impossible to fully test the IT systems before the

launch, raising the risk of problems significantly. However,

based on the small scale testing they conducted, the system

was deemed ready to take live.

Together with Imperial TobaccoCanada, Ryder built a SuccessfulDirect to Store Sales system by:

� Hiring and training a dedicated

sales force of 300

� Hiring and training customer

service-oriented delivery drivers

� Building 6 warehouses and

14 cross docks

� Building a multi-temperature

controlled, state-of-the-art

warehouse to store manufactured

products in Mexico

� Building a logistics network to

move tobacco from Canada and

the U.S. to Mexico for production,

and deliver finished product

directly to each province in

Canada on a just-in-time basis

� Hiring and training warehouse

staff, and developing an efficient

picking and packing process

� Procuring 218 vehicles for

shipping and store deliveries and

equipping them with powerful

security systems to protect

drivers and product


said Andrew Fairlie, director of customer logistics for

Ryder in Montreal. “At one point in time they had more

than a $1 million in accounts receivable they hadn’t been

able to process because the PODs weren’t finalized.”

At the same time, labor costs went through the roof.

Due to the short implementation timeline, new employees

needed more hands-on experience, and were challenged to

replenish the unpredicted volumes that had previously

been fulfilled by the outgoing wholesalers. “At one point

in time, we had about 970 people, and the ideal number

was somewhere in the 550 to 600 range,” Fairlie said.

Security was another challenge. Tobacco products

are very easily sold on the black market. Even with all the

security measures put in place before the launch, more

were needed to protect the drivers and their products.

For the next six months, the staff at Imperial and

Ryder spent the majority of their time putting out fires –

and often having spirited discussions with each other.

Each team would prepare its own reports for meetings

Flipping the switchOn September 5, 2006, Imperial Tobacco Canada

and Ryder flipped the switch on the new direct to store

sales system. More than one thousand people had new

jobs overnight, and the challenges – especially in IT –

mounted immediately.

“It was a nightmare,” Robitaille said. “The system

could not be tested fully loaded, so when everything was

turned on, it crashed. When we did the simulations with

a few hundred transactions, it was fine, but when it got hit

with thousands of transactions at once – we’re talking

about 25,000 transactions a week – it crashed.”

Also, the handheld computers did not immediately

work as designed, so to keep product deliveries going,

drivers had to collect a signed paper version of the proofs

of delivery (PODs).

“Imperial Tobacco Canada would try to charge the

retailer and the retailer would say: ‘You never delivered it

to my store, I didn’t approve it and I’m not paying for it,’”

Moncton, New Brunswick

Pointe Claire, Quebec (Montreal)

Brampton, Ontario (Toronto)

Winnipeg, Manitoba

Monterrey, MexicoProduction Facility

Calgary AlbertaVancouver, British Columbia

Distribution Centers andTheir Cross-Docks

Vancouver, British ColumbiaKelownaVictoria

Calgary, AlbertaEdmonton

Winnipeg, ManitobaRegina, SaskatchewanSaskatoon, Saskatchewan

Brampton, Ontario (Toronto)Ottawa (Ontario Side)KingstonOshawaLondonWindsor

Pointe Claire, Quebec (Montreal)Trois RivieresQuebec CityOttawa, Ontario (Quebec Side)

Moncton, New BrunswickDartmouth, Nova ScotiaFredericton, New Brunswick

Distribution Center

Cross Dock

Imperial Tobacco Canada’s Direct To Store Sales System


that frequently reflected conflicting metrics. To deal with

discrepancies, both companies brought in additional

support to find clarity.

“The first six to eight months were rough,” Robitaille

said. “I don’t think people had many hours of sleep during

that period of time. It was quite a challenge.”

Turning it aroundAfter months of battling the problems, both

Imperial and Ryder realized that only by working together,

could they overcome these challenges. They took a collab-

orative approach to address core issues at the root of their

system-wide problems.

“The past is the past,” Robitaille said. “Everybody

makes mistakes so we needed to work together to solve

the issues.”

The first step was a fundamental structural change

at Imperial. The project had originally been organized under

two departments: sales and marketing for the retailer

aspect and the supply chain group for shipments to and

from Mexico. The company now placed

responsibility for direct to store sales –

everything from manufacturing

through delivery of products –

under the supply chain

group, so that one

team had visibility

of everything from

Mexico to Canada.

Ryder and Imperial

then brought in new

managers and functional

teams with representatives

from both companies, to

generate cross company

reporting. They also formed a project governance board

with representatives from both companies to address larger

issues as they arose.

“Every single aspect changed and the only way it

worked was due to great collaboration between us and

Ryder,” Robitaille said. “We put our best people to the

issues and Ryder’s openness to operate this way made it

work. We agreed we needed to come out of it as quickly

as possible and the only way to do that was a common

understanding and approach. From that point on, we

turned this thing around. We knew there was not going

to be an overnight miracle, just hard work and we started

to tackle one issue at a time.”

With those structural changes in place, the teams set

out to address the major issues.

Simultaneous problem solvingThe first issue was the handheld computers and the

subsequent effect on cash flow. Before the transition,

Imperial’s accounts receivable were running at 28 days –

now there were a mountain of issues due to the paper

PODs. Until the mobile technology started functioning

properly, there was no way to reach the goal of receivables

of less than one day.

Ryder’s IT teamworked with the system integrator

and within 8 months, the handhelds were performing as

specified, drivers were collecting electronic PODs and retailer

accounts were debited within four hours of product delivery.

The next issue was picking performance. At the end

of 2006, UPLH (Units Per Labor Hour) – one of the key

performance measurements – was running at an inefficient

60-65 using 600 pickers. Ryder’s engineering team and

the onsite operators examined the line configuration and

changed it from a horseshoe shape to a straight line.

This allowed workers to pick from both sides of the line,


dramatically improving pick accuracy and productivity.

They also made improvements in training and began real-

izing gains because of the experience levels of the workers.

In the first nine months of 2007, UPLH improved

182 percent from 71 to 130. Today, with only 200 pickers,

UPLH averages 177 – almost triple the rate achieved

before the changes were implemented – with pick accuracy

of greater than 99.8 percent.

The third issue was financial reporting and control.

In the first 8 months of the project, financial information

was very limited for both Imperial and Ryder. The

Imperial/Ryder team implemented a new financial system

and put consistent processes and cost controls in places.

At the beginning of the year, Imperial needed a regional

financial analyst in all 6 distribution centers. Today, there

are only four analysts. The system now provides informa-

tion so efficiently that Ryder came in $120,000 under the

mid-year 2007 forecasted budget.

Finally, Ryder brought in its head of corporate security

to help address the continuing problems with hijackings.

The team redesigned security in trucks and at the facilities,

with measures ranging from assigning security cars to escort

every truck to a sophisticated network of microphones,

sensors and panic buttons in all vehicles.

“We focused on spending money on the right security

systems,” Fairlie said. “Now instead of spending $1 million

a month on security, we’re spending less than a quarter of

that and doing a better job.”

By the end of 2007, the collaboration between Imperial

and Ryder had transformed the supply chain operation system

into a world-class state-of-the-art distribution network.

Leading the marketThe improvements resulting from the teamwork have

been nothing short of miraculous, with the direct to store

sales system now meeting or exceeding all of its goals.

“The concept didn’t change, but the details on the

implementation did,” Robitaille said. “The number of

routes, how the routes were structured, the number of drivers

needed, the number of people in the warehouses, how

picking lines were structured and how it was organized –

all of that changed.”

That’s the kind of result you can achieve when the two organizations

put their heads together to fix things. You go into any of the

stores and talk to the retailer and they’ll tell you they get top

notch service from both of our organizations.”

Robert Robitaille - Vice president Supply Chain-Canada, Imperial Tobacco Canada

“

Martin Guimond,director,SecondarySupply Chain,Imperial TobaccoCanada; RobertRobitaille, Vicepresident SupplyChain - Canada,Imperial TobaccoCanada; AndrewFairlie, directorof customerlogistics forRyder - Montrealreview direct tostore salesnetworkstrategies.


One of the primary objectives – improving relations

with, and service to, retailers – has been definitively met.

“In terms of the overall direct to store sales and product

distribution, we’re ahead of anybody,” said Martin

Guimond, director, Secondary Supply Chain for Imperial

Tobacco Canada.

In a Synovate Research study of 1,000 retailers across

Canada, Imperial Tobacco Canada was ranked the best

consumer goods company with 47 percent of retailers

surveyed ranking Imperial first (Coca-Cola ranked

second with 29 percent). Fifty-three percent said Imperial

had the best distribution (Coca-Cola/ Pepsi ranked second

at 25 percent) and Imperial tied Coca Cola / Pepsi as the

best in trade marketing.

“Imperial’s products are delivered to retailers by the

same drivers with whom they’ve built prior relationships”

said Ryder’s Bergman, “This personalized delivery system

is a prime advantage we have in the marketplace.”

“That’s the kind of result you can achieve when the

two organizations put their heads together to fix things,”

Robitaille said. “You go into any of the stores and talk to

the retailer and they’ll tell you they get top notch service

from both of our organizations.”

With the fundamental operations of the direct to

store sales system meeting performance expectations,

Imperial and Ryder have now turned their attention to

driving even more efficiencies, which translate into both

financial and environmental benefits.

The greening of direct to store salesIn a distribution system, an obvious area of

improvement is route and fleet management, which can

produce significant fuel, maintenance and labor savings

while reducing the amount of carbon emissions produced

by shipments.

“We’re looking at route design,” Guimond said.

“One of our key performance indicators (KPI’s) is mileage

driven by order delivered. We’ve monitored this very

closely and we know we can improve even more. At the

same time, we’ll reduce fuel consumption.”

“We started with 183 delivery routes and are now

down to 167,” Fairlie said. “That’s been a combination of

more efficient routing and redesign. We reduced staffing

and we’ve reduced trips as well, while maintaining more

than 20,000 deliveries per week with a 99.5% On-time in

Full performance. We’re planning to save approximately

$3 million this year in transportation costs.”

The companies are also looking at the vehicle sizes

and have started using smaller trucks for some deliveries,

saving fuel while delivering the same amount of product.

“Like anything else, you have to adapt to the market,”

Robitaille said. “There are market areas where sales are

increasing, areas where sales are decreasing. We always

review our routes and volumes. We’re optimizing the

distribution network this year and following that we’ll

look at what little things there are to improve. We always

have ideas.”

Reusing and recycling resources is another area that

is now reaping financial, environmental and customer service

benefits. The companies are now using the cardboard

cartons used to ship product from Mexico to Canada

as delivery cartons to retailers, eliminating the need to

purchase separate containers.

“That wasn’t part of the original plan, but we had

all these excess boxes so we looked at using them,”

Robitaille said. “Now we’ve moved a step ahead and

In the first nine months of 2007, UPLH (Units Per Labor Hour) improved

182 percent from 71 to 130. Today, with only 200 pickers, UPLH averages

177 – almost triple the rate achieved before the changes were implemented

– with pick accuracy of greater than 99.8 percent.


have started a pilot program in Winnipeg where retailers

can return the boxes. And a good percentage of them are

being returned. So we have another step in the recycling

of the cardboard cases.”

“The retailers like it because it takes the boxes out

of their stores,” Fairlie said. “Our drivers take the product

out of the box to confirm the count with the retailer.

Once they’re done, the boxes are empty and the retailer

doesn’t want the product back in the box, so the driver

takes them away.”

“It’s a good example of another win-win for the

organization,” Robitaille said. “It’s a win for the business,

it’s a win for the environment and it’s a win for the retailer.”

Good relationships for successChanging a company’s entire supply chain. Moving

from a wholesaler distribution model to direct to store

sales. Moving production to a different country. Having

the ]ability to display your product to consumers taken

away. Adding tremendous complexity to IT systems

with little testing. Any one of these challenges would

scare some managers away, but to tackle them all in an

18-month period and be successful takes skill, focus

and great partners.

“When you think about a partnership, you have to

think long term and think about all its parts,” Robitaille

said. “It has to be a win-win for both sides and that’s a

maturity both sides need. You have to have combined

goals to improve productivity and reduce cost, have

people work together, and make joint investments. It’s

not easy.”

“This is the most comprehensive endeavor we’ve

undertaken as a company,” Bergman said “In the end,

Imperial said we are the world class provider they were

looking for, we delivered beyond the business case that

was originally presented.”

“The most important part of all this is the relationship

we have with our partner, Ryder,” Robitaille said. “That to

me is the most important. You might think you have a good

relationship with a 3PL until you go into a big trough. At

that point in time, that’s the test. It takes two to tango to be

successful and the relationship is the key factor. And I must

say we’ve had a tremendous relationship with Ryder.”e

Ryder’s IT team worked with ImperialTobacco Canada to implement more efficientmethods of documenting PODs (proof ofdeliveries). drivers collect PODs electroni-caly and retailer accounts are debitedwithin four hours of product delivery.


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US/CanadaToll Free: 1-888-887-9337Mexico: 1-305-500-3138China: 86-21-5382-6622

Ryder is a Fortune 500 provider ofleading-edge transportation, logistics andsupply chain management solutions.

www.ryder.com

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RyderSystem,Inc.Allrights

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Imperial Tobacco Canada transforms its distribution channel literally