Several months ago my wife mentioned, in a subtle way, that she misses Giordano’s Pizza. Giordano’s is our favorite pizza joint and we used to eat there daily while I was a graduate student at The University of Chicago. I’d say most of my graduate student loan debt went to Giordano’s in exchange for their delicious and famous stuffed pizza.
To appease my wife’s appetite (and mine), I decided to purchase some Giordano’s for overnight delivery. In this post, I’ll discuss good pizza and the supply chain it takes to deliver it, including the strategic role of The Warehouse.
I ordered 2 Cheese pizzas and they arrived the next day in a box containing an internal dry-ice box. We let the pizza’s thaw in room temperature and cooked them and enjoyed eating them. It felt as if we were living in Chicago again. Absolutely convenient.
There is a network of 48 Giordano’s restaurants and they are all in Illinois; they have been featured on NBC (GE), Fox (NWS), New York Times (NYT), and the Chicago Tribune (TXA), which has brought much popularity to the Giordano’s Pizza brand and now they now ship nationwide and, I’m guessing, the online sales channel is probably capturing a good chunk of the revenue.
The Pizza Supply Chain
In reverse order, starting with an Illinois-based customer, the Giordano’s Pizza Supply chain looks like the following (hint: diagramming a supply chain works best when you start with the customer and work backwards):
Customer => 48 Restaurants => 1 Distribution Center => Individual and Local Raw Material Suppliers
Because Giordano’s operates only in Illinois, it only needs 1 distribution center to house the raw material and take advantage of price-quantity discounts. Because of the close Illinois proximity, it can also do more frequent deliveries to individual stores of less product, ensuring freshness. This follows the Toyota model of smaller batches, but more frequency in material delivery.
For non-Illinois residents (like me), there is an added few steps to the supply chain:
Customer => 3PL Freight Partner (FedEx) => 48 Restaurants => 1 Distribution Center => Individual Raw Material Suppliers
The Role of a Warehouse
Why have a warehouse at all? It takes labor, capital, space, equipment, and information systems. Unfortunately, most firms cannot avoid this expense all-together; reduce, yes, but the Warehouse actually plays a really important role in the supply chain. Namely, The Warehouse is a strategic response to Supply & Demand, Transportation Costs, and Value-Added Processing.
Supply & Demand
A major challenge in managing supply chains is that demand can change very quickly, but supply is takes longer to change — that is, supply is not as responsive because there is usually some transformation that needs to happen, such as raw materials to finished goods, which takes time. But, demand is not very forgiving or patient and can change almost instantly. Supply is more “sticky”.
As a response to unknown or seasonal demand, the Warehouse plays a strategic role in assuring that there is product available, so that customers don’t find themselves wanting and firm doesn’t find itself unable to meet demand and face loss of sales, goodwill, and morale for the employees.
The Warehouse allows the firm to respond quicker when demand changes. The Warehouse acts as a buffer to changing demand, unreliable transportation, congestion in any part of the supply chain. As an added part of the complexity of supply chain management, the points of congestion in the system must also be managed.
Some questions to consider:
- Given the approximate location of 80% of the customers and considering costs, response time, political climate of the country, and transportation reliability, what is the ideal geographical location of material sourcing, manufacturing, assembly, and warehousing?
- What inventory buffer stock levels are appropriate for The Warehouse to hold? Replenishment levels? Use-to-Exhaust policies?
Consolidate Product Reduces Transportation Costs
There is a fixed cost everytime product is transported. Given the price of fuel currently and the instability of the US Dollar to other currencies, this is especially true. To amortize or reduce the pain of this fixed cost, it’s necessary to fill the carrier to capacity. In the industry, this is typically called “Truck-Load” and the opposite is “Less-Than-Truckload (LTL)”, regardless if transportation is achieved by truck, plane, or boat.
The pizza example above takes advantage of product consolidation well. Imagine if tomatoes, mushrooms, pepperoni, ham, pineapples, etc., were shipped directly from the material supplier to the 48 stores? The transportation costs alone would eat away any margins, not to mention the over-labor and over-effort that might be involved in that type of operation.
Provide Value-Added Processing
The final assembly could be done at The Warehouse. For example, if you produce a product that is private-labeled for your customer, then the product differentiation could be done at The Warehouse. Generic parts can be shipped to The Warehouse and then labeled to the customer specifications to achieve differentiation.
Back To The Pizza
The pizza was super good. This real-world example also gave me an added appreciation for good bootstrapping small business that gets things done to serve the needs of the customer.