Catch of the Day

Jul 01, 2003 9:30 PM  By

ONLINE GROCER FreshDirect launched its business using a seemingly simple strategy: fresh foods, made to order, at prices as low as 35% below retail. But there’s nothing simple about what happens in the company’s warehouse. Which, president Jason Ackerman is quick to point out, isn’t really a warehouse at all.

FreshDirect’s business model is based on a shortened supply chain. Instead of buying from middlemen, the company buys whole carcasses, live lobsters, unroasted coffee beans, bulk vegetables and cheese, and a long list of other foodstuffs from the myriad farms, dairies, fisheries, and ranches that produce them.

Everything comes into FreshDirect’s 300,000-sq.-ft. storage, manufacturing, and distribution facility in Long Island City, NY, where the grocer then turns the raw goods into food for consumers’ tables. Workers make chickens into chicken breasts and chicken soup, for example, and roast and blend coffee. Finished goods are sold directly to consumers through the firm’s online store. The twist: FreshDirect stocks whole components on a just-in-time basis, and nothing is manufactured until it’s actually ordered. Customers can specify how thick to cut a steak, how thin to slice the cheese, and whether they want their salmon whole or filleted.

STARTING AFRESH

“We try to do much more fresh products and less packaged goods because we think the piece-pick business of packaged goods is a very difficult and hard business, and there’s not a lot of money in doing that,” says Ackerman. An ex-investment banker, Ackerman co-founded FreshDirect in 1999 with food industry veteran Joe Fedele, CEO.

“The essence of [what we're doing] is building a manufacturing business on fresh food and doing it as much as possible on a just-in-time and made-to-order basis,” adds Ackerman. By controlling processing, he notes, “you can achieve a higher gross profit margin than a store ever will because you can eliminate a lot of the inefficiencies.”

After three years of planning, FreshDirect started selling to consumers last July. The firm is carefully rolling out its service, which is currently available in select areas of Manhattan. At last count, FreshDirect was serving more than 40,000 customers and handling 15,000 orders per week. Ackerman projects revenue of about $100 million for 2003 and more than double that next year.

Perishables account for 75% of FreshDirect’s inventory. The rest is non-refrigerated packaged goods such as crackers, soft drinks, and paper towels. The company has roughly 10,000 items on hand at any one time, including whole components and end-products.

ZONED OUT

FreshDirect’s manufacturing facility meets voluntary USDA guidelines and the Hazard Analysis Critical Control Points (HACCP) food safety system. The building, Ackerman says, “is designed to have all the quality controls that you would expect from a world-class manufacturer, even though none of those requirements are actually placed on us by any government regulations. We did it because we want to set a new standard for the food consumer.”

There are 12 different temperature zones within the plant, ranging from -40°F to an ambient 72°F and over 30 distinct environments within those 12 zones. For example, the facility has separate rooms for aging meat, cutting meat, de-veining shrimp, roasting coffee, ripening fruit, storing dairy, and producing kosher foods. A 20,000-sq.-ft. kitchen has nine different areas for functions ranging from baking bread and making soup to preparing ready-to-heat meals. The kitchen and deli have separate and discrete air flow systems to prevent cross-contamination between areas where raw meat is prepped versus cooked.

HOLIDAY ON ICE

FreshDirect’s attention to cleanliness seems to border on obsession. “We de-bacterialize [sic], foam down, and sanitize our entire food production area every night,” says Ackerman. “Before we begin the day, we take swabs of every area where food touches machinery or is packaged. Our labs do not allow us to start production unless those bacteria counts are below an acceptable level. We do shelf life and quality tests on all of our manufactured goods constantly, in our in-house laboratory.”

FreshDirect has seven refrigerated docks for receiving food. Depending on what comes in, it might go right onto a production floor or into medium-term inventory. Nothing sits around for very long. The plant might have 20 days’ worth of inventory for unroasted coffee beans, for example, but only a day and a half’s worth of fresh fish.

Customers can choose a next-day delivery slot. Orders need to be received by midnight for a next-day weekday delivery or by 9 p.m. for a next-day weekend delivery.

“We can pull the orders as they’re coming down throughout the day,” says Ackerman. “Lots of our orders are placed several days in advance. Let’s say it’s 7:00 at night right now. We know statistically if we have X number of pounds at 7:00, how many pounds we’ll end up with. So, we can start doing pre-production before midnight. Come 10:00 at night, the coffee guy shows up and he begins roasting the coffee that’s sold for that day. He finishes all his roasting by 3 or 4 in the morning. While he’s roasting the stuff, we’re starting to compile the orders for the production floor to be packed out. People are then pulling that roasted inventory, bagging it to order, and sending it down to be packed.”

TIME-SENSITIVE

FreshDirect’s custom-built, front-end software integrates with the company’s SAP manufacturing software system to ensure efficient flow from order taking through manufacturing. During picking, if an order can’t be completed because, say, a shipment of meat is late, that box can be flagged in the system, continue moving through the line, and then be diverted to an area where it can later be filled, sealed, and sent to the right truck.

Operations are so efficient, there’s no time for ice cream to melt or meat to spoil. “Everything is produced in the right temperature,” says Ackerman. “By the time it’s manufactured and leaves a department, within 15 minutes it’s in a bag and on a truck.” And yes, that truck is climate-controlled, too.

Dana Dubbs is a freelance writer who can be reached at ddubbs@pacbell.net.

Just-in-Time Order Processing

The orders get taken, we determine how they’re going to get routed for the day, we build our trucks, and then we drop down requirements to each department in the plant simultaneously, telling them what they need to do to supply that truck,” says FreshDirect president Jason Ackerman. “We can pick anywhere from one to 10 trucks at the same time.”

In each department, manufactured goods are bagged, bar coded, aggregated in boxes, and then sent along conveyors to one of three sortation areas — refrigerator items, non-refrigerator items, and frozen foods. Bar codes contain every bit of information about the customer. Pick-to-light systems direct pickers through the pick-pack process. When a picker begins to assemble an order, the information contained in the bar code on the first item he scans starts the picker on his path. The system organizes picks based on velocity and weight.

FRESHDIRECT

Headquarters: Long Island City, NY
Revenue: Projecting $100 million by end 2003
Total employees: 450
Manufacturing/distribution employees: 250
Phone: (718) 928-1000
Fax: (718) 928-1050
Web site: www.freshdirect.com
Manufacturing/distribution facility: 300,000 sq. ft.
SKUs: tens of thousands, including all custom variations
Shipments: 15,000 per week

Suppliers

Manufacturing software: SAP
Scanners: Symbol Technologies
Label printer: Zebra Technologies
Pick-to-light system: Theotek
Sortation and conveyor systems: Ermanco
Carousels: Diamond Phoenix
Forklifts: Crown
Boxes: Stone Container