SPARTAN ALTERS ITS COURSE

DAVID ORGEL

GRAND RAPIDS, Mich. -- Spartan Stores' Patrick Quinn is watching the rise of what might be called the alternative format wholesaler -- and he knows it means a new day for Spartan and other conventional wholesalers.

He refers to growing momentum for third-party operators attempting to set up distribution networks outside the conventional wholesaler structure.

"This will be a very different kind of competition for us as distributors," said Quinn, Spartan's president and chief executive officer, in an interview with SN. One third-party distributor is even attempting to set up a national network of information-driven cross-docking facilities for the supermarket industry. Quinn said Spartan is facing competitors who claim they "can distribute faster, better and with a lot less cost per case for retailers. They see us wholesalers in the equation, but a big part of our business goes away if we don't do anything different. We have seen the future, and we want to be in it."

Accordingly, Spartan, the 77-year-old cooperative wholesaler here, which supplies about 500 supermarkets and posted volume last year of $2.1 billion, is pursuing a number of major steps to rework its business processes and alter the way it looks at the wholesaler's role. One important aim is to keep Spartan vibrant in the face of new distributor competition. No less important, Spartan's moves are intended to arm its independent retailer customers with the efficiency tools to compete against alternative-format retailers. Some key elements of Spartan's agenda include these: · The company is working with an IBM systems unit to fashion nothing less than a total re-engineering of Spartan's business processes to create more efficiencies. The multistep program will enable Spartan and its retailer accounts to employ many of the elements of Efficient Consumer Response, such as continuous replenishment, cross-docking and Activity-Based Costing, or ABC. · The wholesaler is considering consolidating distribution centers as it becomes more efficient.

· Spartan is opening its business to nonconventional supply arrangements. It would be willing to supply alternative-format retailers if those deals wouldn't harm its existing accounts. Moreover, the company plans to offer direct-store-delivery services to companies outside its cooperative network, whether or not those deliveries involve grocery-related products.

· The wholesaler is rethinking its decade-old decision to avoid owning stores. Now, in the face of retail consolidations in its market areas, the company will consider owning stores in order to protect its market share.

Spartan's comprehensive re-engineering program is the biggest news at the company in a long time, and it has raised many eyebrows in the industry.

"I'm sure there would be some people out there who wonder if we've got all our marbles," said Quinn. "I'm sure some would disagree with us as to timetables and strategy. But many operators are moving in similar distribution directions, so I don't know that you can't move in that direction."

Others may be heading that way, but most don't have Spartan's jump. Spartan first acted on many of these issues back in August 1992, before ECR became a key entry in the industry's vocabulary. Eight Spartan associates began working intensively with executives from IBM's distribution consulting group to create a new direction for the company's distribution framework and identify processes that could be eliminated or streamlined.

"The question we asked was, 'If you were going to establish this company today, what would it look like?' " Quinn recalled.

After intense interviews and analysis, the team determined that Spartan had some 307 different processes in its business, and it could cut those down to about 103 with the right technology.

"One example was our ordering process," Quinn explained. "If you could see the diagram of what our ordering system looked like, with all kinds of arrows coming from all directions, we were doing a lot of redundant processes and reacting rather than planning. But we realized it could run much more smoothly with the right technology."

In July 1993, Spartan hired Integrated Systems Solution Corp., an IBM subsidiary based in White Plains, N.Y., to help execute a technology-intensive re-engineering plan called BASE, for Business Automation Support Environment. The company set a time frame of about three years for full implementation. Spartan's lead in-house quarterback on the project is Bill May, vice president of management information systems.

One of the key elements in the plan is continuous replenishment. "Continuous replenishment will be a reality for us within a year to a year and a half," Quinn said. "In some cases replenishment would go right from retailer to manufacturer. "Our role is to get the retailer the best net landed cost. That will indicate some different ways for us to do business. We will have more direct shipments from manufacturer to retailers and cross-docking.

"We think there'll be significant cross-docking. Volume items would be the first for that, which would be a chunk of our business."

May envisions a relatively seamless system taking shape. "Continuous replenishment would be driven by the store's scan data and use electronic data interchange to communicate to manufacturers. Spartan would then handle flow-through cross-docking."

Moreover, in order to add some extra volume, Spartan wouldn't limit its deliveries solely to grocery-related items.

"Our core business will continue to be food, but I think there will be other things we'll transport," Quinn explained. "We can distribute anything. We have vehicles, and whether they carry TV sets or Wheaties doesn't matter so long as we can be highly efficient distributors. In mentioning this arrangement, he points to a similar philosophy at Non-Stop Logistics, the San Francisco-based company that is attempting to create a national network of information-driven cross-docking facilities for supermarkets. (See related story.)

"A company like Non-Stop wouldn't require you to be a regular customer. We'll say the same thing. Even if you're not a regular, we can move it from there to here for you, and you don't need a distribution facility." Will flow-through processes eventually mean that Spartan's distribution facility itself will eventually become an unnecessary tool? "I can't see a time when we won't need a distribution facility, although we now carry more goods than we need to," Quinn said.

Part of the re-engineering's cost savings may come from consolidating or redeploying distribution facilities. Spartan operates three supermarket-oriented distribution centers, all in Michigan. They are in Grand Rapids, Plymouth and Holt, and together represent roughly 1.7 million square feet of space.

"It's realistic that we might consolidate supermarket distribution centers, but we're just now in the process of coming to conclusions; we haven't reached that point yet," Quinn said.

Quinn stressed that Spartan's success rests on the cooperation -- especially technological cooperation -- between Spartan and its customers and suppliers. Spartan already has built partnerships with vendors including General Mills, Procter & Gamble, Nestle Co., Dial Corp., Nabisco and Quaker Oats Co. The wholesaler also is working to provide retailers with state-of-the-art, point-of-sale technology and on-line ordering abilities. "We're developing a model supermarket with the latest technology that will be scalable by store size," said May.

But Spartan also is trying to get a better handle on its costs, and has embraced ABC for that task. ABC, a tool increasingly used to determine all underlying costs of various business activities, "is a very real part of our future at Spartan," Quinn stressed. "We must define all costs going into product handling," he explained. "It's possible to eventually develop a different price for every customer, depending on how efficient they are."

Spartan already has implemented ABC in an initial, rudimentary way in a program begun about six months ago.

"We worked out our delivery charges and costs and realized it costs 67 cents a minute [on average] for a truck to be at a store's back door," Quinn said. "So that's what we'll charge you. And as fast as you can unload, that's what your fee will be. "That program drastically reduced our time at the stores and really did reduce costs. It's still rudimentary because the cost isn't specific to the store. But the concept is important: that we both have something to do with the cost of goods."

In order to coordinate its wide-ranging reorganization programs, Spartan is forming networks of employee teams. "The normal managerial hierarchy won't carry the day in the future," Quinn stressed. "We need cross-functional, self-directed teams that are created around the process they deal with and are closer to the tasks. A team could be involved in the perishables function, for example. The teams could be ongoing or temporary."

Quinn declined to estimate the level of cost savings expected from the BASE project, but said it would be "substantial." The savings will replace some of Spartan's traditional revenue producers. Well before Quinn joined Spartan in 1985 as president and CEO, forward buying and diverting had become business as usual for wholesalers like Spartan. "We see forward-buy money and street money and diverting going away," Quinn predicted. "We have got to find another way to get revenue to our bottom line and still keep our net landed cost as low as possible for our retailer."

In searching out new business arrangements, Quinn has left the door open to working with alternative-format retailers. Spartan's Capistar wholesale grocery subsidiary, based in Holt, already supplies some limited-assortment stores. "We've had discussions with other organizations about such supply arrangements, and we could supply other formats, such as superstore types," May said.

However, Quinn stressed that Spartan would have to be very careful "not to put our own customers at a disadvantage."

One issue that Spartan has agonized over is the store ownership question. While it's not part of Spartan's re-engineering plan, store ownership may have a lot to do with the company's survival in the future.

"We made a decision back in 1985 to get out of corporate stores and refocus on being the best distributor we can be," Quinn began. "While that's still our intention, we may be forced to get back into corporate stores because of customer consolidations. We're now very open to that. We may take over good stores in good markets."

Not that Spartan is setting out to make retailing a major portion of its business. "Not many wholesalers have done well in retail," he said. "You'll be up against people who live, breathe and eat retail all the time. But maybe the future will be different. You'll see more distributors getting into the retailing end."

Spartan's business is about 80% supermarket distribution, the remainder being primarily convenience store distribution. But the company is increasingly hoping to find synergies between the two. For instance, Spartan's L&L/ Jiroch Distributing Co., a convenience store distributor based in Grand Rapids, was able to develop a candy and tobacco program for supermarkets because of its specialty in those categories.

Going forward, the convenience store side of Spartan's business stands to become more important to the company, and the efficiency programs also focus on that sector. Last November Spartan acquired J.F. Walker Co., the nation's eighth-largest convenience store wholesaler, from the Walker family. By picking up Walker, based in Jackson, Mich., Spartan substantially increased its convenience store distribution base to more than 9,000 stores. "Our convenience store business was begun six years ago and this acquisition puts us in that business in a major way," Quinn said. "Convenience stores is about 20% of our overall business, but it may go above that figure. But I still see supermarkets as the core going forward; the two can grow in tandem."

The Walker acquisition will substantially boost Spartan's overall sales growth outlook for the current fiscal year, which ends March 31, Quinn said. "We should be up about 1% in sales on a comparative basis and 5% with Walker included in sales," he said. "That's pretty good in this deflationary environment."

But clearly, Quinn is looking farther ahead than the next quarter or fiscal year as he leads the remaking of Spartan. He occasionally seeks perspective by looking back to Spartan's origins, and he finds history repeating itself in a big way.

"When Spartan first organized 77 years ago, about 27 retailers joined to form this cooperative because they were threatened by chains, and they realized they could buy a carload of sugar together at a better price than a case at a time. That was the beginning. It was alternative-format-driven and cost-driven. And really, we're revisiting that again."