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9B02D003
GROCERY GATEWAY: CUSTOMER DELIVERY
OPERATIONS
P. Fraser Johnson prepared this case solely to provide material for class discussion. The author does not
intend to illustrate either effective or ineffective handling of a managerial situation. The author may have
disguised certain names and other identifying information to protect confidentiality.
Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written
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Copyright © 2002, Ivey Management Services
Version: 2006-01-17
Dominique Van Voorhis, vice-president of industrial engineering and operations
systems for Grocery Gateway, was analyzing the October 2001 monthly report for
the company’s delivery operations at its Downsview, Ontario, customer fulfillment
centre. Although the company was targeting four stops per hour for its drivers, it
had been able to achieve only 2.7 stops per hour in the month. It was November
10, and Al Sellery, Grocery Gateway’s CEO, and Claude Germain, the chief
operating officer, had asked Dominique to make recommendations aimed at
improving delivery operations at the weekly management meeting seven days
hence.
GROCERY GATEWAY
Founded in 1997 by Bill Di Nardo, Grocery Gateway was Canada’s largest direct
online grocer in November 2001, with approximately 125,000 registered
customers. Online shoppers could select from 6,500 items at the
grocerygateway.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.
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9B02D003
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 3,200 square kilometres, with a population of approximately
seven million people (see Exhibit 1 for a map of the GTA). On a typical day
during the peak period between November and April, Grocery Gateway would
receive approximately 1,500 orders with an average value of $135. Sales volumes
were subject to some seasonality with orders declining by approximately 50 per
cent 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 the customer’s door. Claude Germain
commented on the Grocery Gateway’s 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 focused on logistics
execution. We wanted to get it right and have the lowest cost
capability with the best service we could provide.1
In May 2000, 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 5,000 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 2001, Grocery Gateway relocated from its original 6,225 square metre
customer fulfillment centre in Mississauga to a new facility in Downsview, north
of Toronto (see Exhibit 1). 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 ratio of 1:1. This is the
profile of e-commerce orders.
Our new plant is 26,000 square metres at a cost of $15 million. At
the design stage, we clearly determined what we wanted to execute
against, from a throughput, cost position and capability perspective.
1
Source: “Pick Pack Pro,” Materials Management & Distribution, vol. 46, no. 10, October 2001, p. 35.
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We then studied business models out there and took pieces that
seem 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.2
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 was tied
to an order processing system (OPS) and a warehouse control system (WCS). The
OPS managed the execution of the order picking tasks, handled initiation of the
totes and 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 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 EASYpick pick-to-light
system. The pick lights were mounted on the eight-foot flow racking 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 that
customers were available. Unlike other e-tailers, customers paid at the door, not
2
Source: “An Interview with Grocery Gateway,” Logistics Quarterly, vol. 7, no. 2, 2001, p. 30.
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