2005 Supply & Demand Chain 100 Case Study  Otis Spunkmeyer / INSIGHT, Inc.

Profiles in Supply Chain Enablement: The cookie-maker ensures its supply network is optimized, even as the company expands.

Profiles in Supply Chain Enablement: The cookie-maker ensures its supply network is optimized, even as the company expands.

Company: Otis Spunkmeyer (San Leandro, CA)
Company Size: Midsize
Company Sector: Consumer Products (Food)
Area(s) of Enablement: Fulfillment/Logistics, Supply Chain Integration & Infrastructure
Enabler: INSIGHT, Inc. (Manassas, VA)

SDCE 100 2005Case Study: Companies today face the challenge of achieving an efficient supply chain that is flexible enough to respond to constantly changing market needs. The implications of supply chain decisions can mean the difference between spending or saving millions of dollars. Case in point: Otis Spunkmeyer.

Otis Spunkmeyer manufactures dough for cookies, Danish and brownies. The dough is sold to retail outlets, where the dough is baked on-site. In the late 1980s, the $50 million company had one manufacturing plant in San Leandro, Calif., but was looking to expand to the East Coast.

Then the earthquake of 1989 hit, and the East Coast expansion became a high priority. In order to determine the best location for its new plant, Otis Spunkmeyer turned to a solution from INSIGHT called SAILS.

Optimizing the Supply Network

SAILS, INSIGHT's flagship product, helps companies design optimal supply chain networks so they can minimize costs, maximize profits and increase service levels. The software can represent a company's current business practices, from raw materials sourcing to capacity planning through delivery to the end customer. Then, using optimization technology, SAILS determines the best current network and strategically plans the best future network.

Otis Spunkmeyer used SAILS to determine the best location for a plant, and ended up building plants in Pennsylvania and South Caroline. Now over 65 percent of the company's sales volume comes from the East Coast.

Reducing Inventory Centers

Today, Otis Spunkmeyer has a two-touch distribution system; "finished goods" go from the manufacturing plant to inventory centers or co-packers, which in turn distributes to retail locations or food services. In 2000, when Otis Spunkmeyer acquired Mrs. Fields retail stores, the company used SAILS to determine whether the current plant locations were sufficient to meet demand. They also modeled the inventory centers and relocated the Syracuse center into Allentown and absorbed the Dallas inventory center into Atlanta. Now most of the company's major customers are within one or two days of an inventory center.

Four call centers take pre-orders and send these orders to the sales centers on a daily basis. When products are ready to ship from the production facilities, contracted third-party logistics providers (3PLs) pick them up and bring them to one of the 57 sales centers around the country. Otis Spunkmeyer route trucks then take these products from the sales centers to customer doors for direct store shipments. Otis Spunkmeyer chose this hybrid distribution method because it has limited storage and plant capacity and because of its plan to meet customer service levels with their refrigerated products. During warmer months, Otis Spunkmeyer has to make sure that trucks don't sit idle in the yard for too long.


Overall, by using SAILS, Otis Spunkmeyer reduced its forward inventory holding costs by approximately 2 percent by consolidating inventory centers from five to four. The company achieved a net reduction in combined warehouse and transportation costs by 5 percent by relocating its North East inventory center, eliminating a company-owned facility costs by closing the fifth inventory center, and extending customer delivery supply line without impact on service. Finally, the return on investment in the construction of the new production line in the Southeastern United States has been validated, with a reduction in replenishment lane costs over two years.

In the future, Otis Spunkmeyer expects to use SAILS to add a location in the Southwest, integrate raw materials, extend the software to the sales centers, evaluate beyond current pool models, optimized packaging, automate data exchange with vendors and tactically plan whether to use in-house transportation or a 4PL.

Sidebar: Network Design

The goal of network design is to devise the optimal physical supply chain that meets customer demand at a minimum total cost (or in some cases, at a minimum total time or maximum total profit), given the operational constraints of the business. This analysis must determine the sources and facilities to be used in the network, the capabilities that each element in the network should have and how best to flow product between the selected locations. In the case of a time horizon that includes multiple distinct demand periods with notably different characteristics (e.g. years), the analysis must also determine the appropriate timing for any network and flow-based changes.

The analysis process begins with the creation of a historically valid baseline representation of demand, operations and costs, and then uses that model as the basis for scenario driven what-if analysis. In determining the optimal supply chain, network design captures the costs of the business from a total landed cost perspective, evaluating all possible configurations and paths allowed within the specified constraints through the use of robust optimization technology.

Yet network design includes not only a determination of the best source and facility set within each echelon of procurement, production and distribution, but also balances costs across the business vertical and between the various business silos. As a result, a key benefit of the analysis process is the ability to quantify the impact of structural and policy decisions across the entire supply chain.

Furthermore, as the analysis requires a broad cross-section of business expertise, another key benefit of the process is that it provides an unusual opportunity to centralize key operational knowledge and data. The creation of the historical baseline model can at times be almost as beneficial to the company as the optimization itself. Network design is generally strategic in nature and, as such, encompasses a long-term planning horizon (one to three years). However, network design also supports shorter term tactical decisions, such as how to serve new markets or distribute new products given an existing, unchanging network, or where to shift production in order to respond to changes in costs or capacities.

For more stories of successful supply chain implementations, read the "2005 Supply & Demand Chain Executive 100" article in the June/July 2005 issue of the magazine. Also watch the Today's Headlines section of SDCExec.com every Tuesday and Thursday for more in depth best practices drawn from this year's Supply & Demand Chain Executive 100.