Dominque Van Voorhis, Vice-President of industrial engineering and operations systems for Gateway Grocery, was analyzing the October 2020 monthly report for the company's delivery operations at its Downsview, Ontario customer fulfillment centre. Although the company was targeting four stops per hour on area (SPHOA) for its drivers, it had been able to achieve only 2.7 stops per hour in the month. It was November 10^th, and Al Sellery, Grocery Gateway's chief executive offer (CEO), and Claude Germain, the chief operating officer, had asked Dominique to make recommendations aimed at improving delivery operations at the weekly management meeting in 6 days.

Grocery Gateway

Grocery Gateway was founded in 1991 by Bill Di Nardo and was Canada's largest direct online grocer in November 2020, with 125,000 registered customers. Online shoppers could select goods at the grocerygatewat.com website, including dry goods, health and beauty products, meat, fresh produce, frozen foods, wine and beer. Products were priced competitively with grocery retailers, although customers were expected to place minimum orders of $60 and pay an $8 delivery fee. Orders could be altered until about 14 hours prior to delivery.

Grocery Gateway provided its service to residents of the Greater Toronto Area (GTA), the largest urban centre in Canada. The company serviced an area of approximately 3200 square kilometres, with a population of approximately 7 million people. On a typical day during the peak period between November and April, Grocery Gateway would receive approximately 1500 orders with an average value of $135. Sales volumes were subject to some seasonality with orders declining by approximately 50% of peak levels in the summertime. Furthermore, order sizes could fluctuate from 30 to 90 items.

The company offered 90-minute delivery windows from 6:30 a.m. to 10:30 p.m. and orders were delivered directly to a customer's door. Claude Germain commented on the Grocery Gateway strategy:

"We focus on low-cost, high service logistics execution in one market. Some people focus on technology, others on merchandising, but right from the get-go we have focused on logistics execution. We wanted to get it right and have the lowest cost capability with the best service we could provide."

In May, Grocery Gateway secured $33 million in second-phase venture capital funding, bringing to $70 million the total private sector financing raised by the company. During its first two years of operation, management had focused on growth and brand awareness. The current business plan called for continued aggressive growth, with a target of 5000 orders per day within three years. Meanwhile, a primary focus of management was to become cash flow positive in 2001 on a variable cost basis.

Customer Fulfillment Centre

In May, Grocery Gateway relocated from its original 6225 square metre fulfillment centre in Mississauga to a new facility in Downsview, north of Toronto. Claude Germain commented on the new facility:

"There are two core capabilities within our business model, broken case picking and direct delivery. Our aim is to have the low-cost position. We have optimized our facility only for broken case and for a pick-per-sku profile of close to a ration of 1:1. This is the profile of e-commerce orders.

Our new plant is 26000 square metres at a cost of $15 million. At the design phase, we clearly determined what we wanted to execute against, from a throughput, cost position and capability perspective.

We then studied business models out there and took pieces that seemed to fit. Next, we segmented our design into nine segments - a three-by-three matrix that has A, B, C movers on one axis and three temperature zones (ambient, cooler and freezer on the other. We then tried to fit the best design and technology into each and played with integration issues to arrive at a balance blend that would meet our objectives.

Approximately 275 people worked in Grocery Gateway's customer fulfillment centre. Grocery Gateway's systems integrated a variety of technology solutions, built around five main systems that were used to generate and execute orders. The web-order processing system was developed in-house.

Orders from the Web were downloaded into the resources in motion system (RIMMS) and the warehouse management system (WMS) twice daily. RIMMS was a dynamic route optimizer solution from Descartes Systems. It provided route delivery schedules generated from algorithms that took into account delivery windows, drive time, time of day, road type and other factors. The WMS system was tied to an order processing system (OPS) and a warehouse control system (WCS). The OPS managed the execution of the picking order tasks, handled initiation of the totes that made decisions regarding when an order should be picked to arrive at the truck on time. The WCS was customized software that controlled the movement of totes on the conveyor lines, assisted with fixed-position scanners that read the identity of each tote, much like a license plate, and then directed them accordingly

For A items, which were the fastest moving skus, employees walked the aisles and picked items directly into totes as instructed by the EASY-pick pick-to-light system. The pic lights were mounted on the eight-foot flow racing that held the inventory. In contrast, a batch picking strategy was used for the slower moving B and C items. An entire wave's worth of B and C items were picked simultaneously using radio frequency scanners. Batch picking required deconsolidation, where products were separated into individual orders. During this process, totes were lined up behind lights at the deconsolidation station, where a pick-to-light system instructed employees to place items in appropriate totes. When an order was completed, or the tote was "cubed out," the totes were sent to a print-and-apply station where man-readable labels containing route, stop and address information were applied.

Delivery Operations

Grocery Gateway drivers called 10 minutes before arriving to ensure customers were available. Unlike other e-tailers, customers paid at the door, not over the internet. Delivery staff were equipped with remote point-of-sale terminals for debit or credit card transactions.

Grocery Gateway employed approximately 100 drivers and a delivery fleet of 55 trucks capable of handling a total of 125 totes filled with dry goods, cold produce and frozen items. Claude Germain described the strategy underlying Grocery Gateway's delivery operations:

"We have optimized around small-order drop-offs. Our average totes-per-order is four to five. Large drop-offs, that could benefit from being palletized, do not fit our model. Indeed, our trucks are custom designed and resemble UPS trucks - but with three temperature zones."

When Grocery Gateway first started in 1997, drivers would schedule routes manually, which took each driver approximately 30 - 45 minutes per shift. In January 2000, the company purchased RIMMs route optimization software from Descartes. The RIMMS software established the most-cost effective delivery routes based on parametres such as dwell time at the door, vehicle speed and internal vehicle capacity unitization (number of totes). The system provided drivers with specific directions and maps for their routes.

Deliver window capacity management was handled by the Web order processing system. When the software recognized that no additional deliveries could be made within a given time frame, the window was closed.

On average, the driver took 15 minutes for set-up time, 30 minutes for stem time (driving to delivery area), 30 minutes for return to the customer fulfillment centres and 15 minutes for close-out. This left an average of 6.5 hours available for deliveries. Management estimated that the variable cost of a vehicle and driver was approximately $30 per hour.

Performance Objectives

Two key objectives for Grocery Gateway's delivery operations group were to achieve four SPHOA and reduce delivery windows to 30 minutes. In preparation for the meeting the following week, Dominique established what he considered a reasonable breakdown on driver delivery time:

Nine minutes of contact per customer:

• Two minutes to park, get ready some invoices, identify totes
• Two minutes to unload and go to the door
• Four minutes with customer - unloading, receiving payment
• One minute to return to the vehicle

Six minutes of drive time per customer:

• Average speed in residential areas of 15 kilometres per hour, including starting, stopping, etc.

In preparation for the meeting, Dominique collected information on the most recent week's delivery activity. In October, Grocery Gateway delivery 2.7 stops per hour on area 9SPHOA), which measured from the beginning of the first stop to the end of the last stop and did not include drive time to and from the delivery area.

Dominique felt that there were a number of alternatives worth considering. First, he could keep the trucks on the road longer by extending driver shifts. However, to execute such a plan he would need a plan to replenish the trucks as well as to ensure the high level of service the Grocery Gateway base had become accustomed to. A second option was to approach Descartes, who provided the RIMMS route optimization software, to expand the licensing arrangement to include a new feature that analyzed route profitability and to determine the desirability of delivery in particular time slots. Dominque expected this would cost approximately $250000. A third option was to suggest an increase in the delivery charge. Dominique expected that Grocery Gateway's customer were attracted to the convenience, and charging a slightly higher charge might be a good trade-off compared to decreasing customer service levels.

As Dominique examined the data, he recognized that he still had a week to get ready for the meeting. However, he knew that he must present a thorough plan, one that was consistent with the overall strategy.

In-Class Activity:

Day 2

Activity Steps:

	What is the immediate issue to be solved in this case?
	Name at least 5 basic issues that need to be addressed.
	What is your analysis of the situation at Grocery Gateway? Include the following: Company history Current situation Target market - Who uses Gateway Grocers service Yearly sales. Use data from the case. What is the delivery capacity of Grocery Gateway? Use the data from the case. Provide your calculations. How can you increase delivery time at Grocery Gateway? Use data from the case. Provide your calculations.
	How many trucks would Grocery Gateway need to make 5000 orders in one day? Provide your calculations.
	What are the pros and cons of the three options identified by Dominique?
	Name at least two other alternatives. Please provide the pros and cons of each alternative.
	What recommendation would you suggest and why?
	Check out Grocery Gateway at: Online Shopping & Delivery in Toronto - Grocery Gateway.
	Provide a brief synopsis of how the company is doing today.
	Create a formal case study report to be passed in on the last day of the module.