ASSOCIATED FOOD ACCELERATES

ELLIOT ZWIEBACH

SALT LAKE CITY -- Associated Food Stores here is undergoing major surgery. After falling behind much of the industry in the areas of re-engineering and technology, the $940 million cooperative is attempting to bring its members up to speed by making radical changes in the way it operates, Richard Parkinson, president and chief executive officer, told SN.

"Our board was anxious to have Associated adapt to changes they were seeing elsewhere that we were not making -- not simply to catch up to the Flemings and Supervalus, but to deliver maximum value to our customers," he said.

Parkinson said it will take about 18 months for Associated to restructure its distribution systems to eliminate all duplication and inefficiencies and enhance its delivery systems "so we can hit the perfect order consistently every time."

The perfect order, he explained, provides the right goods at the right time at the right price and in the right condition. Besides reassessing the fundamentals of its business to achieve perfection, Associated is also taking other steps to enhance its growth and develop new forms of revenue and capital, Parkinson said. Those steps include the following:

Investing $2.7 million in new technology in an effort to retrieve data directly from the point of sale rather than relying on information from the trade.

Expanding its capital base over the next five years by substituting investment stock for the five-year debt-based certificates that have historically supplied funding.

Contemplating the addition of a for-profit convenience-store subsidiary and possibly adding more nonmember customers to improve its efficiencies and buying power.

Getting into store ownership on a limited basis to test technologies and train personnel. Associated is a 52-year-old cooperative whose 730 retail members operate stores in Utah, Colorado, Nevada, Montana, Idaho and western Wyoming.

The company operates divisions in Boise, Idaho; Billings and Helena, Mont.; and in Salt Lake City. It closed a facility in Pocatello, Idaho, last May and consolidated that volume into the Boise and Salt Lake City warehouses.

Parkinson told SN that when he succeeded Gil Warner as Associated's top executive two years ago, "my marching orders from the board of directors were to look at our basic work processes and develop new directions and new visions for the company to make our members more competitive in terms of efficiencies, pricing, services and technology.

"The changes we're trying to implement go to the root of our members' basic belief system," he explained. "Through re-engineering, we're moving away from a command-and-control environment, where all knowledge moves from the top down, to a more team-based organization, where information moves upward."

Over the years, the cooperative had been adding systems and work processes "without ever reinventing them," Parkinson said. "For example, we found that products were being handed off 15 to 17 times between the manufacturer and the retail shelf, which provided a number of opportunities for mistakes and inefficiencies.

"We also found that we had too many silos of involvement -- departments that worked independently of each other in a system that was cumbersome and didn't render good customer value because it didn't facilitate the flow of goods in a seamless manner."

Associated began the re-engineering process a year ago when it designated 10 employees from a cross-section of the company as a "red" team assigned to look at three areas: order fulfillment, retail support and services, and corporate support and administration.

"They initially sought to gain a better understanding of how we did business," Parkinson explained. They then looked at other companies -- including Hannaford Bros., Scarborough, Maine; Spartan Stores, Grand Rapids, Mich.; and firms outside the grocery industry -- "to benchmark the best business practices and to restructure our own work processes to create a seamless process that eliminates separate silos of involvement," he said.

The red team offered its suggestions for a redesign of the order fulfillment process in February, and after board modifications, Associated began implementing the process in late July, Parkinson said. It will probably be another 18 to 24 months until it is fully operational, he added.

The team's recommendations on retail support were submitted to the board in June, with implementation possible by the fall, Parkinson said. Its suggestions on corporate support will probably be presented early next year, he added.

In the area of order fulfillment, he said, the red team suggested breaking the system down into seven subprocesses: category management, shelf management, distribution-center inventory management, sales and profit development, distribution center operations, inbound logistics and outbound logistics.

As changes are made within those subprocesses, each will be coordinated with the others until all the parts mesh, Parkinson said. One of Associated's major challenges in implementing the order-fulfillment process, he pointed out, is its historic weakness in the area of technology.

To correct that shortcoming, the cooperative has committed $2.7 million to technology, including installation of a Dallas warehouse system, which should be fully implemented by early next summer, and installation of an E-3 buying system to facilitate category management, which should be operational by the end of next year, Parkinson said.

In addition, Associated expects to install an Intactics shelf management system to analyze point-of-sale movement data and to develop schematics for product placement on retail shelves, after full implementation of the E-3 system. Also planned by early next year is a category management system for the warehouse.

The cooperative is trying to get its members thinking with a category management mentality. "Historically, we've defined our marketing effort as advertising, but now retailers have to consolidate marketing with pricing, promotions and shelf management," Parkinson said.

"Our goal is to effect a shift from being driven by the trade to pulling information back from customers ourselves and letting them dictate category management," he said. "The real challenge for us won't be retrieving information from the point of sale and then moving that back to the retailer. The challenge will involve getting all retailers up to the necessary technical standards to facilitate an exchange of information because, although 80% of our volume is scanned, less than 50% of our members have scanning."

To get more members involved with scanning, Associated is offering what Parkinson regards as a less expensive, more user-friendly scanning system developed by the Retailer Owned Research Co., a subsidiary of the Retailer Owned Food Distributors Association, Birmingham, Ala., "whose front-end system is adaptable to any architecture, geared to smaller operators with three to five checkout lanes and at half the cost of other systems." He said the RORC system costs $4,000 to $5,000 a lane rather than $10,000 to $12,000 a lane for installation of a scanning system from a major manufacturer.

Associated members began installing the RORC scanners this summer, and Parkinson said it will probably be at least two years before the majority of the retailers are on-line.

To enhance its ability to provide members with competitive tools, aside from technology, Associated changed its bylaws earlier this year to alter its capitalization structure, Parkinson said. "In the past, we've retained half of the members' patronage dividend and rebated 50% of the excess revenues to members in cash and the other 50% in five-year, interest-earning certificates that are rolled from year to year as they mature.

"However, in May, the membership voted to change the bylaws to allow the company to distribute investment stock, which will become the capital base from which we will work."

The members' certificates accumulated over the last five years amounted to $48 million this year, Parkinson said, while the new capital base has the potential to reach double or triple that figure, depending on what kind of working capital is needed in any given year. However, Parkinson said, it is unlikely the company would need much more than it currently spends. Associated's directors will decide later this year when to begin issuing investment stock certificates instead of the five-year certificates, he added.

Among Associated's current capital projects, Parkinson said, is a $2 million expansion of the frozen food facility at its Boise distribution center -- a 30,000-square-foot addition to the 180,000-square-foot warehouse.

Construction for the expansion will start later this year or early next year, with completion targeted for the spring or summer of 1997, Parkinson said, "which is when we will really need the extra space." Once the expansion is completed,

Associated will convert the 21,700 square feet of existing frozen food space in Boise to accommodate additional space for meat and other perishables, he said. Associated is also contemplating using its 90,000-square-foot former nonfood warehouse in Salt Lake City to develop a food-service operation for existing customers and a new convenience-store distribution center, according to Parkinson. "As we look at the growth of home meal replacements, we think a food-service warehouse can address that need," he said.

The cooperative already serves a small number of nonmember convenience stores that account for $20 million, or about 2%, of its total volume, Parkinson noted.

"But we see a potential for upwards of $50 million to $60 million a year from convenience stores over the next couple of years," he said. "We've already discussed it with the board, and we believe convenience stores show a good bottom line and there are synergies we can benefit from.

"We already have the necessary racking in the warehouse, and all we'd need to do is add some support equipment for $300,000 or $400,000," he added.

The convenience stores Associated would supply would not be members of the cooperative but part of a new for-profit subsidiary, Parkinson noted. Current C-store customers -- all of which are nonmembers -- buy from the cooperative's cash-and-carry outlets. The only nonmember supermarket retailer currently supplied by Associated is Buttrey Food & Drug Stores Co., Great Falls, Mont., which sold its Payson, Utah, nonfood distribution center to Associated in the spring of 1995. The addition of that facility freed the cooperative's existing nonfood warehouse for the potential food-service and convenience-store businesses. "At Buttrey's option, they entered into a supply agreement for us to supply their nonfood needs for the next five years on a cost-plus basis," Parkinson said. "That doubled our nonfood volume, made the warehouse more efficient, increased our purchasing power and gave us more product diversity to enhance our members' marketing opportunities. "It was tough convincing members in Montana that we should supply Buttrey, but once they recognized the advantages, they dropped their objections." Parkinson said Associated doesn't expect to pursue any other nonmember customers "until we stabilize and complete our redesign." Another break with the past for Associated is its consideration of getting into retail store operations. Although the cooperative is the lessee at some locations run by its members, it has historically not operated any stores. "But we may develop one individual unit to use as a test site for technology in a controlled environment and to serve as a training store," Parkinson said. He explained that Associated would probably opt to own the store in a joint venture with one of its existing retail members, which would operate it with its own people and would eventually buy Associated out, after which Associated would seek another location and go through the same process. "We're looking for a site right now, and we think we'll have one picked out by the fall," he said, adding that construction would be planned for the spring and the opening for next summer. The first store will probably be 35,000 to 40,000 square feet and located within 50 miles of Salt Lake City "in a rural environment that's representative of our members' stores," Parkinson said.