Keeping On Track

By Larry Dignan  |  Posted 2004-02-17 Print this article Print

Is online grocer FreshDirect about to succeed where Webvan failed miserably?

Keeping On Track One micromanagement moment: A 40-ish man wearing a white coat and hairnet walks by Wayne Roopnarine, vice president of operations, with an eggplant and stops for a brief chat. "See these?" the man says, pointing to a trio of spots on the eggplant.

"Interesting degradation. Don't forget the photo shoot," says Roopnarine.

"We experiment with produce in different temperatures and humidity levels and take photos for our records," explains Roopnarine. "Tomatoes have to be warm. Finding the right temperature for bananas is our biggest challenge. We want a vibrant color when they go on the truck."

If FreshDirect can take what it learns about temperatures, humidity and other factors and embed that in mathematical rules, then its information systems could improve bottomline results for the company. Toward that end, Fedele recently hired Dean Furbush as chief operating officer, and Myles Trachtenberg as chief technology officer, to give the company number-crunching power. Trachtenberg's predecessor, Robert Slater, left for personal reasons. Furbush was executive vice president for transaction services of the Nasdaq Stock Exchange. Trachtenberg was chief information officer at Prudential Healthcare and a technology executive at Chase Manhattan, now J.P. Morgan Chase.

In order to boost the size of each order and drive FreshDirect into profitability, Furbush and Trachtenberg intend to mimic Dell, Amazon.com and FedEx Corp. in their ability not just to cut out middlemen, but to listen closely to what customers want.

The company did not quite break even on its $90 million in sales for the year ended Sept. 30. But its average order size did reach $97, up from $79 at the time of its launch a year earlier. The company is adding wine and other pricey goods to help boost the typical order past $100.

But it can also reach profitability by cutting costs. Fresh- Direct's systems will be tweaked to help it identify the cost of each step of fulfilling its 3,500 daily orders, from initial preparation to shrink wrapping to packing to shipping. FreshDirect will analyze, for example, the positions of workers throughout the warehouse and calculate the most efficient place for each one along its conveyor belt.

Currently, hunches and gut instincts rule. At 6 a.m., the company's vice president of operations, chief operating officer and chief technology officer often roam the plant floor, watching how workers prepare orders. Then, they watch as orders move through the plant, reaching a crescendo at 4 p.m., the last moment that FreshDirect can afford to get crates into a truck for delivery and still reach customers coming home from work. The executives monitor "choke points" that slow down work, such as the speed of conveyor belts. One morning in November, for instance, one belt was moving meat too quickly for packers to keep up. The fix was to slow down the belt for more consistent flow. That fix, however, took days of observation. The change could not be tested until the following Wednesday, the one day each week new logistical procedures are tried out. That can mean a week of savings lost.

Eventually, FreshDirect may feed information from its Ermanco conveyor and sorting systems as well as its Diamond Phoenix carousels into its SAP planning software. Bar codes on crates and packages will allow FreshDirect to pinpoint any order anywhere in its plant at any time-or even the individual components of an order. Tracking the pieces will let it figure out how to process orders better. Faster processing means less inventory on hand, lowering costs.

Trachtenberg's objective is to keep no more than 72 hours worth of inventory at any time. If successful, FreshDirect may be able to predict how many turkeys to load up on before Thanksgiving and how many bunches of bananas to stock in December versus July.

"We want to track margin by department and give managers overall [profit-and-loss] responsibility for their goods in real-time," says Trachtenberg, who hopes in 2004 to have managers making decisions based on such metrics.

Trachtenberg also hopes to start cross-selling, using the Web site. For instance, FreshDirect could suggest a red wine to go with each order of filet mignon. Right now, FreshDirect's site mainly helps customers with new orders by giving them access to their previous ones.

Tenser of VSN Strategies says FreshDirect for now is angling for that $20 a week that the typical grocery shopper does not spend in a store. However, FreshDirect could become time-starved customers' primary grocer if it continues to add products.

"It's a game of stealing share from local grocers," says Tenser. So far, he says, "FreshDirect appears to be skimming the cream very well."

But whether FreshDirect's single-distribution-center strategy can work in other cities remains to be seen. FreshDirect's focus on meat and produce in particular suits its home market well, says Tenser, because "it's hard to find decent-looking produce at a grocery store in New York." FreshDirect trucks also don't have to travel far, unlike what the case would be in such sprawling cities as Dallas or Los Angeles.

Fedele does say Boston, Atlanta and Washington, D.C., would be natural locales for FreshDirect, along with "anywhere people want better food at better prices." But he says Fresh- Direct isn't in any rush to expand beyond New York.

Right now, the Long Island City plant is only operating at 12% capacity. Fedele says the warehouse should be operating at 70% of capacity before FreshDirect would consider expansion seriously.

"Before we expand with cookie-cutter facilities we have to get this one right," says Fedele. "What will we run into at 30% and 50%? And 70%? Will we have to reengineer? We're stepping on the moon here and you never know what's in that next crater."

Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.

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