SPARTAN, P&G PARE COSTS OF DISTRIBUTION

MARC MILLSTEIN

CHICAGO -- A collaborative effort between Spartan Stores and Procter & Gamble to streamline distribution operations generated large cost savings, according to Jim Swoboda, manager of grocery purchasing at the Grand Rapids, Mich., wholesaler.

"We were able, over a very short period of time, to reduce the amount of inventory we were carrying on P&G's products significantly. We took it from $6.5 million to $4.5 million, and we did that in several months," Swoboda said at a seminar on category management here sponsored by the Grocery Manufacturers of America, Washington.

"We also found that we were able to reduce product and handling expenses throughout our systems to the tune of $1.4 million. That involved distribution costs, product damage, invoicing errors and many other areas," he said.

The test program, from June 1992 to August 1993, involved all P&G products handled at two of Spartan's main distribution centers. Officials of both companies worked closely together to understand common distribution practices, identify areas of possible improvement and eliminate redundant operating systems, Swoboda said.

Among the findings of the project:

The turn rate on P&G's products jumped from 12 to 18, resulting in $700,000 in annual savings to the wholesaler. Those savings were then redeployed to further Spartan's ambitious re-engineering project.

The "perfect order" rate, defined as product orders that arrive

on-time, complete, damage-free and billed accurately, increased dramatically. "The industry [perfect order] average is in the low 60% range. P&G, on average, was doing about 65%. We have now increased that to 81.6%, and it is getting better all the time," Swoboda said.

The use of electronic data interchange was implemented for use with all of P&G's products. "Through this partnership we were able to start and execute EDI quickly, and we did it with very few problems. We are currently live with EDI with all of their products," he said.

By using activity-based costing to understand the costs of handling specific products, the two companies were able to develop more sophisticated pricing programs and increase sales.

"By starting to understand the basis of activity-based costing, we have also been able to increase business in the P&G products by 5%. "Much of that is driven by understanding what the real costs are in handling products and being able to put some of them in the marketplace at a more competitive price, from which [P&G] realized a 5% increase in movement," Swoboda said.

The program with P&G, though, is only the beginning. Spartan has taken the initiative and invited other manufacturers to join with it in trying to improve distribution practices, Swoboda said.

Specifically, Spartan invited seven manufacturers to meet with the wholesaler in September "and talk about ECR and category management and all of the things that we are trying to do," he said.

The sessions, which took place from January to March, resulted in several initiatives that Spartan and its partners are in the process of pursuing. One of them would involve a "vendor certification program," Swoboda said.

"If we can get a vendor to a level of sophistication where we no longer have to [manually] check the invoices, check the loads, do any of that work anymore, then we could apply activity-based costing techniques that would result in a lower cost of goods to our stores," he said. "We have [also] been exploring advance ship notices, electronic fund transfers, barcoded packaging lists and [other] category management principles. We have several tests going with manufacturers now in some of these areas."

In one test, Swoboda said, Spartan took a pet food category and went through a three-month analysis using warehouse withdrawal data.

"We don't have results finalized yet, but I can tell you that we took 32 stockkeeping units out of that category, added 16 new SKUs and totally changed the mix and focus of what it was we were after. "We are now in the measurement phase to determine if we are going to get the results we predicted based on our target audience for pet food," he said.

While the answer to how best to manage the distribution of specific product categories may not yet be clear, however, Swoboda made a spirited call to wholesalers to take the offensive in defending their business practices against the possible encroachment of alternative distribution formats.

"We believe that distribution is ours to lose. There are smart third-party logistics companies out there today that are quick, learning, fast and adaptable. They are going to take business away from wholesalers across the country if we don't move faster," Swoboda said.

"Spartan's focus is on Efficient Consumer Response. We are going to drive it as much as we can. We strongly believe that the industry has to stop quibbling about who gets the savings in ECR. "Because the real reward for all of us for participating in ECR is that we get to stay around and play the game. It is that simple. That is why ECR has to happen. If it doesn't, a lot of us will go away," he said.