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Sunday, November 28, 2021

The Roasted Bean Supply Chain

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Peet’s Coffee was going through a digital transformation when Covid-19 hit. Despite the significant amount of effort involved in going from running a business on Excel spreadsheets to implementing an enterprise resource planning (ERP), they are very grateful that their efforts to improve their supply chain agility were underway when the pandemic hit.

Founded in Berkeley, California in 1966, Peet’s Coffee touts itself as the original craft coffee. The company has a sourcing team that vets the beans. All their coffee is produced in small batches and roasted at their own LEED Gold certified roasting plant in Almeda California. Craft food products usually have unique flavors and are sell at a premium price. Eric Lauterbach, the chief of operations and president at Peet’s, points to the freshness of the coffee as being critical to the flavor. They roast all their coffee in a roast-to-order production process. All their coffee packages in groceries have the date the coffee was roasted on their packages; and this date label is centrally placed on the package and it is easy to read. They seek to sell their coffee in the grocery channel within 90 days. Coffee sold in other channels is much fresher.

This is a much more complex supply chain than you might expect for a company that has approximately a billion dollars in annual revenues. The company has about 200 of their own coffee shops; Peet’s also sells coffee bags and K-cup packages through 15,000 warehouse clubs, grocery, and convenience stores nationwide. Finally, Peet’s also has an ecommerce channel – Amazon
, Costco.com, and direct to consumer. 25 to 30 active blends, in a variety of different package sizes, move through these different channels.

Direct store delivery (DSD) is critical to the freshness of their coffee. But direct store delivery also contributes to the complexity of Peet’s supply chain. In DSD, instead of shipping truckload quantities of goods directly to a retailer’s regional distribution center every few weeks, a manufacturer has their own account representatives that sell to and service individual stores. Those reps go into stores and stock the store shelves. Thus, in addition to their roasting plant with an inbound warehouse attached to it, and a warehouse for outbound finished goods in nearby Oakland, the company also has 700 reps that source their product from roughly 100 small DSD warehouses across the nation. These DSD warehouses in turn receive less-than-truckload size shipments on at least a weekly basis. Direct store deliveries contribute to freshness in another way; the reps help to maintain a first-in-first out rotation of products on the store shelf.

“If you are not in DSD, you can’t afford to get in,” Mr. Lauterbach said. “If you are in it, you can’t afford to get out.” After initiating direct store deliveries, the company immediately gained market share. But DSD was part of the reason “we were in stock when others were not” during the pandemic. Peet’s runs their DSD supply chain using an application from Körber (formerly known as HighJump Software).

Peet’s has been doing DSD, on a growing scale, for several years. When Mr. Lauterbach joined the company in 2010, 70% of sales came from the coffee house channel rather than the grocery and ecommerce channels. “Now that is inverted.”

It was fortuitous for Peet’s that they had other sales channels. When the pandemic came, customers stopped going to their coffee shops. Meanwhile sales in the other channels surged. The company, because of DSD, was ready for surging sales in the grocery channel, which went up over 25%. “But we were not ready for the surge in ecommerce. It happened overnight.” Their direct-to-consumer sales were up 50% up, and sales through Amazon were up 70%!

The company did make some changes to their business to cope with the pandemic. They reduced the number of products they sold down from 25 blends to 10 core blends for every channel. “We had to simplify our supply chain in a hurry,” Mr. Lauterbach explained. The company also initiated daily calls between their plant manager with merchandising managers across the company to better match demand to supply. At the same time, they were trying to cope with the pandemic, they were piloting EDI for Amazon and testing a new handling system for green coffee. Finally, they were in the midst of an ERP and warehouse management implementations. In normal times, implementing these enterprise applications would be almost all consuming.

It is surprising that a company this size was running their business using spreadsheets and manual processes. “But visibility was becoming a challenge,” Mr. Lauterbach explained. “We were not just 200 little coffee shops anymore. We were not able to scale our business.” 

Peet’s was implementing Microsoft
Dynamics 365 Finance and Supply Chain Management when the pandemic hit. The supply chain application included warehouse management capabilities. Their integration partner was Blue Horseshoe Solutions. Blue Horseshoe and Microsoft have a long-standing relationship when it comes to creating warehousing and transportation capabilities for Microsoft customers. Microsoft purchased Blue Horseshoe’s warehousing and transportation products in 2012. In 2019, Microsoft licensed additional advanced warehousing capabilities from Blue Horseshoe which have become part of the Microsoft Dynamics 365 Supply Chain Management module.

The digital transformation was critical in helping Peet’s cope with ecommerce orders that surged from 8,000 per week to 24,000 per week. Blue Horseshoe helped Peet’s layout the warehouse to better support ecommerce. “When they came in, they were candid with us. They told us there was a better way to do things,” Mr. Lauterbach admitted. Partly this involved consulting around the layout of the warehouse. Partly it involved adding new processes – things like slotting planning, efficient receiving and sorting for inbound operations, and put-to-wall picking – that were instantiated in the Dynamics 365 solution they implemented.

Not all managers were happy with the changes. Change management is always a challenge in ERP implementations. But the resistance is easier to understand for Peet’s. Peet’s was experiencing a situation where the warehouse was “struggling just to keep their head above water” because of the surging orders. The pandemic also meant that the supply chain team needed to figure out how to do social distancing in their plant and warehouses. This in turn meant adding new shifts, which was also a nontrivial exercise.

The changes Peet’s made to make their supply chain more agile are remarkable in light of the circumstances they faced. But their work is not done. Peet’s was fortunate neither their roasting plant nor distribution center were forced to close because of the pandemic. But the company realizes they need to build more resilience into their supply chain. They are exploring opening a second warehouse east of the Mississippi.

There are also opportunities to save money on transportation in their DSD supply chain by adding mixing centers. Finally, Peet’s is also exploring demand management and transportation management systems.

Mr. Lauterbach summed things up by saying, “We are at the one-year mark with the pandemic. It has been a heck of a year.” I’m pleased with the investments we made. I’m pleased with the Blue Horseshoe relationship. I’m glad it (the ERP project) is over. But I wish we had done it earlier.”

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