SCARBOROUGH, Maine -- Beginning next month, Hannaford Bros. here will test a personal computer-based system that helps analyze minimum optimal ordering quantities in dry grocery. This information will be fed into the retailer's buying system to determine minimum pallet ordering configurations.
If the system proves to be effective, Hannaford will be able to determine if it's receiving orders in the configuration that maximizes warehouse productivity and minimizes handling costs.
The system, which will be tested at the retailer's Butner, N.C., distribution site, compares costs for ordering in the vendor's pallet configuration and the distributor's pallet configuration. The computer model also provides the optimal configuration to meet turn targets and the optimum order quantity based on demand, though it does not provide a net landed cost.
Among the cost factors the system considers are warehouse labor costs, product costs, carrying costs of the inventory and different prices based on quantities and storage costs. By evaluating all the information, Hannaford will be able to set the standard, or minimum, order quantity for an item.
"We're going to look at the suggested optimized order quantities compared to the current minimums in our buying system, make the appropriate changes based on that analysis and then measure the productivity improvements at our distribution center while monitoring the impact on turns with our inventory level," said Gerry Greenleaf, director of logistics at Hannaford.
"If our decision makes financial sense, we'll repeat the process with another vendor," he added. "My hope is, over time, we will go distribution center by distribution center and take all the vendors in grocery, dairy and frozen," through this process.
Typically, a retailer's minimum order quantity is a multiple of a pallet or a layer. This order quantity varies among products and even among manufacturers of the same product.
"On some items we're doing a good job of buying, but sometimes for the sake of focusing on increasing turns, which reduces our inventory, we buy more frequently," Greenleaf said. "If we're buying in less-than-pallet quantities multiple times in a week, we're putting a lot of warehouse labor in to handle that product. That process may be more expensive than the investment of having more product come in on a pallet less frequently," he added.
Using the system, "our goal is to find that optimum balance based upon the average demand of the product," Greenleaf said. "And we hope it saves us money."
Greenleaf said his "gut feeling" is that the computer system will probably increase Hannaford's inventory investment. This may not be a bad thing, however, because the retailer's emphasis on increased turns may have lowered inventory investment, "but it's costing us in warehouse productivity, handling and receiving inefficient quantities," he said.
Hannaford will begin assembling a cross-functional team, consisting of distribution, logistics, merchandising and finance, to handle the activities related to the test in Butner, N.C.
This location has the most opportunity for improvement because it's the retailer's newest facility, and one in which Hannaford wants to maximize the usable space, said Gary Watson, director of transportation and supply side distribution at Hannaford.
The computer model was developed by the Continuous Replenishment Process Improvement Group. Watson is Hannaford's representative on that group.