GMA Unsaleables Innovation Award Outline

							GMA Unsaleables Innovation Award: Kraft Food’s Dover, DE Operations

INTRODUCTION: “ Damage free product begins at the production line…”
Damage-free product begins at the production line. While significant progress can be made to reduce
damage and unsaleables at various points in the supply chain, true success must be measured at the
point of manufacturing. This is the approach that was taken by Kraft Foods as we pursued solutions
to a growing Unsaleables challenge that had its origins at our manufacturing plant in Dover,
Delaware.

Our Unsaleables innovation effort began as a single-focused initiative designed for one primary
objective: eliminate damage caused by clamp and slipsheet handling at the Dover plant. However,
as participation on the team increased and new areas of opportunity were identified, the Dover
Palletization project soon expanded to incorporate multiple levels of damage reduction and supply
chain efficiency improvements.

The strategy was simple: produce all finished goods product at the Dover plant directly onto Chep
pallets (approximately 462,000 pallets and 39 Million cases annually), handle all pallets using forklift
equipment at the plant, and ship the pallets double-stacked through the Kraft distribution network.

For Kraft, this simple change reaped significant benefits, including the following:

          Customer Unsaleables reduction
          Inter-company damage claim reductions
          Internal warehouse damage reduction savings
          Plant, buffer and mixing center warehouse capacity and space utilization savings
          Plant, buffer and mixing center labor efficiencies
          Increased Direct Plant Shipment (DPS) capacity to customers
          Stretch-wrap and material cost savings
          Material Handling Equipment/Forklift standardization and equipment savings
          Avoidance costs associated with upgrading corrugated shippers

The success of the Dover Palletization project was driven by a core leadership team in Distribution
plus additional cross-functional support from Manufacturing, Engineering, Packaging R&D and an
external engineering consultant, St. Onge Company.

The following pages provide additional detail regarding the overview of this initiative, some of the key
benefits and results, and the applicability of this project to other CPG companies.




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GMA Unsaleables Innovation Award: Kraft Food’s Dover, DE Operations

II. OVERVIEW OF INNOVATION:

Conceptual design of the Dover Palletization project began in June 2002. The initial focus was on
making improvements to pick-line operations and enhancing the capacity for direct plant shipments
(DPS) from Dover to customers. The DPS initiative had been underway with the assistance of St.
Onge Engineering. The shift to broaden the scope of the project was introduced in late 2002, in order
to facilitate future state supply chain improvements.

With the project’s official kick-off in January 2003, a cross-functional team was formed to identify
general and detail design criteria to support its new primary objective: conversion to pallets at the
point of production. Key to the project’s strong start was the support of internal stakeholders across
the entire Kraft Foods network.

Proposed Changes

In order to understand the level of proposed improvements, product flow, process and method
changes are described below, including both Before Palletization and After Palletization:

         Before Palletization: In this process, all palletized product exited from 16 palletizers on
          dedicated re-cycled white wood pallets with deck sheets. The unit and pallet were
          separated by one of three de-palletizers where the pallets were re-cycled back through the
          system. All units were then stretch-wrapped on six sides and handled by carton-clamp
          and/or slip-sheet equipment to the warehouse storage block or truck for shipment. The
          system was designed for pallet-less handling within the Plant and shipment to the 3PL
          Buffer warehouse and Mixing Center (DC) network; and when it came time to ship to the
          customer, the product was then transferred to a wooden pallet. In this process, product
          was subjected to multiple handlings and cause for the majority of internal and external
          damage, as well as, material handling labor inefficiencies.

         After Palletization: Changes at the point of production were implemented by inserting
          wooden pallets and thereby eliminated dedicated re-cycled pallets and deck sheet
          expenses. In this revised design, all palletized product exited from 16 palletizers, stretch-
          wrapped on four sides and double-stacked in pairs for storage and/or direct shipment. This
          allowed for streamlining and converting all material handling systems to forklift handling
          methods at the plant and downstream within the network. These changes all but
          eliminated carton-clamp and/or slip-sheet equipment damage and multiple handling labor
          costs. (See Illustration)

Testing and Evaluation of Changes

With the project underway, the team assessed damage data from both customer and inter-company
sources. In order to validate the proposed changes, various test protocols of control units without
pallets and test units with pallets were designed and implemented under the direction of Packaging
R&D. Test pallets were palletized with four-sided stretch-wrap; whereas, control pallets were non-
palletized with six-sided stretch wrap.
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GMA Unsaleables Innovation Award: Kraft Food’s Dover, DE Operations

II. OVERVIEW OF INNOVATION: (Con’t)
In February 2003, static storage tests commenced with pallet stacks of four test pallets and four
control pallets of multiple items. The area selected for the tests paralleled seasonal humidity
conditions, as well as, days of supply levels normal for the storage of these products. In June 2003,
evaluation of the stacks’ bottom pallets revealed that overall damage results of the test pallets were
reduced by 80% compared to control pallets.

Next, the team conducted shipment tests of both test pallets and control pallets. From July-August
2003, test loads were shipped through various travel lanes and using multiple shipment types (i.e.,
inter-modal and over-the-road). As part of these test shipments, the application of stretch wrap was
evaluated for proper tension, load stability and incidence of carton damage. The test results were
similar to the static storage tests and confirmed that the test pallets provided improved load stability
and only minor damage.

In summary, the statistical differences between test and control unit damage were overwhelmingly
convincing and supported the team’s damage rates assessment for cost savings and development of
the project’s Return on Investment (ROI).

Implementation
At Kraft Foods, all major capital projects require a Value Engineering process review. The process
known as “Capital Challenge” surfaces new and applicable ideas that could alter any aspect of the
project’s design. Based on years of past experiences with Kraft, performing network, facility design
and modeling, St. Onge Engineering was selected to facilitate the project’s Capital Challenge
process. Throughout these sessions, St. Onge provided direction to the team in determining the
optimal operational model and design criteria for each problem (challenge), in order to assure the
highest probability of project success.

As with any change initiative involving process, equipment and method improvements, capital
investment was needed to expand and automate the Plant’s palletizer area by adding and/or
replacing stretch-wrap, unit load stacker and pallet accumulation conveyor equipment. Additionally,
there was forklift replacement equipment that off set more expensive carton-clamp and slip-sheet
equipment investment. Also, pallet storage rack equipment was needed, in order to neutralize any
loss of floor storage space utilization. Given capital equipment investment and targeted cost savings,
a favorable Return on Investment was submitted to Kraft’s capital screening committee, and the
project was approved in January, 2004.

Once approved, the Plant’s internal team responsible for project execution began a series of
coordinated actions. The project leader or Project Engineer assumed overall responsibility,
accountability and leadership of the project in accordance with Kraft’s engineering process. However,
like many successful projects there was a shared leadership and enthusiasm that prevailed within the
entire team and plant that contributed to the timely execution of the project’s deliverables.

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GMA Unsaleables Innovation Award: Kraft Food’s Dover, DE Operations

II. OVERVIEW OF INNOVATION: (Con’t)
Progress continued through July 2004 with the delivery and installation of storage rack, overhead
sprinkler systems, unit load stacker and stretch-wrap equipment. The final milestone was achieved in
August 2004 with the successful start up. The project was officially completed in September 2004.




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GMA Unsaleable Innovation Award: Kraft Food’s Dover, DE Operations

III. RESULTS & BENEFITS
There were many tangible and intangible benefits that resulted from the Dover Palletization project.
Some of the intangible benefits include the following:

      High level of involvement and ownership by all employees across the entire operation,
       demonstrating their ability to adapt to change with an energy level above and beyond
       expectations.
      Strong vendor support and involvement from Kaufman Engineered Systems, which led to key
       successes for both stretch-wrap and unit load stacker equipment design, process specification
       improvements and both on-site and off-site operator input and training at Kaufman’s
       headquarters.
The tangible benefits include both financial and operational measures. Since the project’s
implementation, damage reduction levels and labor savings are pacing well above expectations.
Specific results on all key deliverables are as follows (as of March, 2005):

1. Internal and External Unsaleables reduction:
        Reduced inter-company damage: Estimated 15% vs. Actual 47%
        Reduced internal warehouse damage: Estimated 30% vs. Actual 53%
        Reduced customer damage: Estimated 15% vs. Actual 24%

2. Streamlined and standardized handling methods and equipment:
       Reduce labor-training expenses by 50%
       Reduced network detention expenses due to improved truck turnaround by 33%
       Increased storage capacity throughout the network by 6.4%
       Increased customer shipping capacity by 50%
       Reduced clamp-repair and stretch-wrapper maintenance systems expense by 89%
       Increased stretch-wrap system throughput capacity by 25%
       Reduced lift-truck battery changes at the Dover plant by 25%

3. Advanced stretch-wrap design, waste and process-flow application cost savings:
       Reduced pallet deck sheets and re-cycled pallet material disposal expenses by 5%
       Reduced stretch-wrap expenses by converting from 6-sided to 4-sided equipment by 30%




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GMA Unsaleable Innovation Award: Kraft Food’s Dover, DE Operations

IV. Applicability and Relevance to Other Companies in the CPG Industry

Today’s CPG competitive business environment demands network changes that will continuously
improve speed and flexibility from plant to store to shelf. As an enabler, the Dover Palletization
project provides a proven model to deliver significant supply chain innovation improvements within
the CPG industry. These improvements include the following:

             Reduce damage unsaleables
             Reduce internal warehouse damage
             Reduce inter-company damage
             Reduce detention costs
             Reduced stretch wrap material costs
             Improve labor efficiency
             Increase storage and shipment capacity
             Collaborate with supply chain partners
             Coordinate cross functionally in a team process to strengthen supply chain relationships
             Develop mutually beneficial process and methods improvements

Kraft Foods’ approach to these improvements was to custom design a new process flow, implement
handling method changes and invest in capital to support conversion from clamp and slip-sheet
equipment handling to forklift handling of palletized loads. This particular innovation is not
necessarily new, but its relevance is strategic for the plant, the business categories impacted, and
both internal and external customers across the supply chain. The economic dynamics of this
approach are favorable and friendly not only internally, but for our customers also.

Its applicability and key learnings are transferable to any business that is looking to engineer a proven
solution for pallet storage and handling systems and/or design a similar model to customize their own
opportunities and strategies to achieve comparable results.

One significant aspect for initiating innovation and major change is to create a holistic supply chain
focus and in doing so engage senior management’s support up front. Another very important aspect
of the Dover model for initiating change is to engage all employees and resources in the change
process from design to implementation. The outcome of these efforts created a highly dynamic level
of employee involvement and willingness to adapt that unleashed several new and unanticipated
opportunities throughout the operation. This shared approach generated energy in shaping change
and participation in the development of new operating methods that is sustaining continuous
improvement and ongoing success.

At the Dover plant, damage free product now begins at the production line, and synchronizes through
the buffer warehouses and distribution centers, all the way to the customer’s retail store shelf.




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                       Dover Polarization Project
                       Conveyor Layout and Process Flow




                  E
                                                                     B                                 A
                                                       C
                                            D



              F


            G




The new layout for the Dover Palletization project involves the transfer of unit loads from the palletizer
directly to either one of two parallel power conveyors. The above illustration provides more details
regarding the process flow.

1. A palletized unit load exits the manufacturing line (A) and is moved into the stretch-wrapper.
2. Upon exiting the stretchwrapper (B), a bar code ticket is applied and the bar-code reader registers
   the unit load.
3. From the stretchwrapper, the unit load enters the sorting area (C). This section consists of five
   separate transfer sections (one for each production SKU) where each unit load is queued. Each
   queued unit load waits to be paired with a second unit load containing a similar SKU.
4. The unit load is moved to the double-stacker (D), at which point a stationary fork truck picks up the
   first unit load and positions it on top of a second unit load to form a double-stacked unit.
5. Once two unit loads are double stacked (E), they are moved together to the accumulation
   conveyor.
6. At the accumulation conveyor (F, G), double-stacked units are picked-up by a forklift driver and
   loaded into a truck or put away into warehouse storage.
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