Price Chopper: Breaking New Ground With Computerized Ordering

MICHAEL GARRY

It sometimes happens in food retailing that a retailer will stake out a leadership position in one particular technology application. The retailer invests more resources than anyone else in that application and may find that it gains a marked competitive advantage as a result.

In RFID, for example, Wal-Mart Stores is far and away the industry pioneer. Wegmans Food Markets has led the way in the adoption of data synchronization with its suppliers. And when it comes to computer-based store ordering, Price Chopper, Schenectady, N.Y., has accomplished more than most food retailers.

Price Chopper has not only applied automated store ordering to warehouse-delivered Center Store products — that is something it shares with Hannaford Bros., among others — but has taken the far more unusual step of applying it to perishables and direct-store-delivery items.

Price Chopper, which runs 119 stores, “is breaking new ground in moving DSD items to an automated ordering platform and taking responsibility for creating the orders,” noted Mike Griswold, research vice president and content lead-retail, AMR Research, Boise, Idaho. Perishables, he added, is “not a normal implementation area” for computer-based ordering.

Price Chopper's bold moves into DSD and perishables were made possible by its experience and success in generating automated orders for warehouse-delivered Center Store and nonfood products, which reduced out-of-stock levels for those products to 2%, from as much as 4.5%, according to Mark Chandler, Price Chopper's vice president of supply chain integration. Griswold described the chain's out-of-stock level as “best-in-class.”

Price Chopper achieved that out-of-stock level with a relatively modest average inventory “pack-out” of 1.5 cases per product, compared with pack-outs of two-to-three cases by retailers that have similarly low out-of-stock levels, said Chandler. The lower inventory helps generate turns that rank among the industry's best, he added, while the reduced out-of-stocks result in higher sales, though that has been hard to quantify.

For its industry-leading efforts in computer-based store ordering, and the accompanying positive impact on inventory, Price Chopper has been selected as the winner of SN's 2009 Technology Excellence Award in the chain category.

AN EARLY ADOPTER

Price Chopper began to explore automated store ordering in 2000 after deciding that the traditional ordering process, based on the knowledge and skill of order writers, was no longer adequate. The chain invested in store ordering software from a company that is now known as Itasca Retail Information Systems, Minneapolis. Chandler declined to specify the amount invested but said that a return on investment was achieved “in year one.” (Itasca said the software costs $10,000 per store.)

Initially, the software was used to generate a computer-assisted order (CAO), which was a forecast of an item's expected sales based on past sales and other factors; order writers were still left with the responsibility for placing the order. In 2003, the chain moved to computer-generated ordering (CGO), in which a computer determines an item's replenishment order by combining the sales forecast (which now has an accuracy rate of about 98%) with a snapshot of its current inventory level (known as perpetual inventory). Employees can still review the computer-generated orders, especially for promotions.

In 2006, Price Chopper completed the rollout of CGO to all Center Store categories, according to George Beaudoin, the project manager for CGO, who has worked on the application since its inception at the chain. Work then began on applying CGO to perishables, which has been completed for many products over the past year. In 2007, Price Chopper launched the DSD phase, which was completed this past March, except for packaged bread.

More recently, Price Chopper has begun using CGO to assess shelf allocation levels. “It can tell us whether there is too much product allocated or too little,” said Chandler.

In automating the ordering of DSD products, Price Chopper took over a function normally handled by the suppliers of the products. As part of that process, the chain maintains a perpetual inventory of these items, as well as a database of sales and promotional history. Price Chopper sends its orders to DSD vendors via electronic data interchange (EDI).

One advantage of automating DSD orders is that Price Chopper is able to get a much better assessment of service levels offered by DSD suppliers, said Chandler. In the past, service levels were based on what percentage of an order a DSD vendor was able to deliver on time. However, that order, submitted by the vendor's in-store reps, may not have reflected what the retailer really needed at the time; thus even a complete delivery of such an order would not be providing true service, he noted.

“We have found that for warehouse items the system writes much better orders than humans, and that applies to DSD as well,” said Chandler. “So now we can look at how DSD suppliers are fulfilling what the true demand for their product is.”

Price Chopper has had productive conversations with DSD suppliers whose service levels based on CGO have been found wanting, getting them to alter delivery procedures, he said. In some cases, the chain has persuaded suppliers to change their supply chain plans, thereby taking cost out of the system.

For example, one supplier eliminated one of the trips it was making to the chain's stores because it “trusted our orders so much,” noted Chandler. The savings that resulted from that decision was shared with Price Chopper, which gained a $1 million windfall in lower product costs, he said.

DSD vendors, however, often continue to send reps to stores to take care of other functions, such as rotating products, removing out-of-date products and performing cycle counts.

HOW MUCH TO MAKE

Price Chopper has applied CGO somewhat differently to perishables. For example, for store-made perishables, the chain provides department managers with just a sales forecast so that they know how much product to produce to meet demand. The production process is still left up to the departments. “We know how much French bread is going to sell tomorrow, and we let the bakery make the product,” said Chandler.

The system does not tell the perishable managers how much bulk product to order. In the case of meat, for example, “it does not advise how many primal cuts to order,” Chandler said. “But it will tell you that today we will sell this many t-bone steaks.”

In produce, the system can generate orders for bags of products like potatoes or oranges, though bags of bananas, which are affected by such factors as ripening rates, are left to the manager's discretion. For loose produce, the system will provide department managers with a forecast of the number of pounds expected to sell, and “let them make an intelligent order out of it,” said Chandler.

Chandler acknowledged that CGO has required a significant amount of training on inventory tracking and conducting daily cycle counts (counting a small subset of inventory). Cycle counts are focused on products whose inventory as measured by the CGO system is not reflected on the shelf. The training process is “a tremendous effort,” he said. “I'm glad that challenge is behind us.” Cashier scanning is another area that has to be monitored for accuracy.

In addition, store employees need to be taught to “trust the system” and not change orders it generates, he said. “That was also a tremendous effort but now stores believe in the orders and don't know how to run their business without CGO.”