PREDICTING PERISHABLES 2004-01-12 (2)

LIZ PARKS

Perishables, as their name suggests, require special care and handling. At a minimum, retailers need to know how much product to stock and produce to avoid losses from spoilage.

In the last few years, a new breed of software has emerged to help retailers with their perishable issues. The software, known as Fresh Item Management and Product Production Management, is attracting their attention because less perishables waste means more bottom-line profit.

FIM generally refers to applications that improve inventory management of fresh items through better forecasting of demand. They can help retailers identify fast and slow turners, making it possible to readjust their product mix so that ordering matches demand more accurately. PPM, a subset of FIM, typically refers to applications that manage processing of foods for departments like bakery and deli.

FIM/PPM applications can improve inventory management in any perishables category, but they have the potential to generate the highest savings and the most efficiencies in departments where product is made fresh either in-store or at a central commissary or central bakery, observers said. That's why many of the early pilots have focused on the meat and bakery departments and, to a slightly lesser degree, on produce, seafood and deli.

One of the first FIM application was developed back in the mid-1980s for Mrs. Fields Cookies, the food-service operator. Applications tailored to supermarkets began to pick up around 2000, and pilots have been increasing in frequency and depth since about 2001.

According to FIM vendors and management consulting companies like AMR Research, Boston, there are between 15 and 26 supermarket chains, including top-tier companies, with annual sales of a billion or more that are piloting FIM/PPM. Also piloting FIM/PPM applications are many regional chains with a strong presence in fresh foods. At least another two dozen pilots are in the works for this year, vendor sources said, which could mean that FIM applications will be in widespread deployment within two to three years.

Scott Langdoc, research director of retail industry for AMR, said pilots with FIM/PPM in supermarket settings have shown "consistently achievable" reductions in shrink between 15% and 40% and significant enhancements in other key performance areas. One grocery retailer, said Langdoc, cut meat shrink in a pilot from 55% of sales to just 1.5%.

An in-store bakery improved forecasting and production, and the result was that sales increased 17% compared to a sales increase of 0.5% for the total store.

A large chain piloting a FIM/PPM application generated a 4% net margin increase which, based on its size, would be the equivalent of $40 million in savings once the system is implemented chainwide.

"There are incredibly strong results for perishables," said Langdoc. "A shrink rate of 1.5% in meat is astonishing. For sales in bakery to go up 17% when the total store's sales were flat is an amazing accomplishment."

Based on the costs of implementation for a 100-store chain, Langdoc estimates that a retailer could get a return on investment of between $1.1 million and $2.5 million in three to 12 months.

"One of the reasons the savings in the pilots have been so dramatic," said Langdoc, "is because of the lack of proactive management of the perishables departments until now [see story, this page]. The inability to go into perishables and really track the movement of products has left a lot of margin dollars on the floor. Now with FIM, the lack of efficiencies is really being examined and exposed, and the benefits are starting to speak for themselves."

No More Hunches

"Probably one of the most important aspects of fresh-item management in grocery," said Langdoc, "is making demand forecasting possible in departments like bakery. Demand forecasting helps a retailer know exactly what they should be making in bakery instead of a retailer using what I call 'hunch-based' decision making, which is not efficient."

"Bakery is probably one of the hardest departments to get your hands around because it is mostly an impulse buy; about 60% of sales in bakery are done on impulse," added Will Dunlavy, the executive vice president and chief operating officer of The Park City Group, an FIM solution provider based in Park City, Utah. "And bakery products have a very short shelf life of about a day, so you need to know how to forecast demand or you're going to have a lot of waste."

St. Louis-based Schnuck Markets, one of the first chains to test FIM, expects to put Park City Group's Fresh Market Manager application into all of its bakery and seafood departments by the middle of this year. A Schnucks spokesman declined to comment on the rollout, but in a prepared statement, Randy Wedel, senior vice president of marketing and merchandising for Schnucks, called the application "an important component in our evolving technology plan," and said it would give Schnucks "at our fingertips, timely and accurate information that we depend upon to make concise decisions for improving our business."

Based on the results of a 70-item pilot, Richmond, Va.-based Ukrop's is rolling out a demand-management solution that has FIM functionality within the chain's kitchen, deli and meat departments. The system, e-demand from Irving, Texas-based DCM Solutions, is also being deployed chainwide by Kansas City, Kan.-based Balls Food Stores. Balls, like Ukrop's, is starting with its perimeter perishables departments.

Ukrop's tested the application first with fresh eggs, and then in the chilled home meal-replacement department, tracking the inventory for dishes that ranged from pasta through chicken, apple crisp and potato salad. By the end of the 60-day test, waste was down by 33%, out-of-stocks were cut by 24%, and sales for the period tracked with or exceeded the entire category by 7%, said DCM.

Just-in-Time Production

On the product production side of the ledger, Pittsburgh-based Giant Eagle and St. Louis-based Dierbergs Markets are using an application called EatecNetX, from Eatec, Emeryville, Calif.

According to Leslie Pullen, marketing manager for Eatec, Giant Eagle employs the system to manage the bakery and deli operations at 102 of its supermarkets; Dierbergs uses it to manage the deli and bakery operations in 22 stores.

Dierbergs runs the application, which interfaces to Dierbergs' point-of-sale and general ledger systems, in its centralized commissary and in its centralized bakery. From those locations, it ships the final products into each of its stores. All purchasing, receiving, inventory tracking, production management and loss management are done in the centralized locations, not in the stores.

The process, said Pullen, has helped Dierbergs track inventory costs, save staff time in production planning, minimize production waste, and allocate the appropriate product mix to ensure its stores don't run out of popular items or overproduce slower-turning items.

Giant Eagle uses EatecNetX to facilitate just-in-time production at store level, minimizing overstocking and reducing shrink. A production scale interface lets Giant Eagle employees know exactly how many items are produced within their departments.

Grand Rapids, Mich.-based Meijer and San Antonio, Texas-based H-E-B are currently testing an application called JDA Recipe and Transformation Management, from JDA Software Group, Scottsdale, Ariz.

The JDA application can keep track of inventory on hand by recording measurement changes, preparation, cook and finish times, ingredients, yield, portions and the costs of labor and packages. "Just the recordkeeping of perishables is tremendously difficult," said Peter Charness, JDA's senior vice president global marketing.