RUNNING THE CHAIN WITH TECHNOLOGY

Michael Garry

Technology at the store level is what is most apparent to shoppers. Yet back at chain headquarters, numerous systems have been used to manage the company as a whole.

In the 1960s, supermarkets began equipping their headquarters with mainframes for billing, accounts payable and payroll, noted Daniel Hopping, consulting marketing manager, IBM, Raleigh, N.C. Today, they are using large data warehouses from IBM and NCR to support server-based applications like customer relationship management (CRM) and category management. The databases are in some cases holding terabytes of information on shoppers' purchasing history.

"My dad knew every one of his customers in his two stores in Indianapolis and what they needed," said Topping. "When you have a thousand stores, you can't do that [without sophisticated technology]."

On the other hand, noted Peter Charness, senior vice president, marketing, JDA Software, "the challenge is can we do as well with all the technology as what we did 50 years ago without it."

Wal-Mart started collecting data seriously in the late 1980s and bought its first Teradata warehouse in 1991, storing 300 gigabytes, said Rick Schultz, vice president, industry marketing, retail, manufacturing and travel, for Teradata, Duluth, Ga., a division of NCR. Today, Wal-Mart's data warehouse contains 150 terabytes (trillion bytes), making it the largest in the world, Schultz said.

In the last two to three years, Schultz said, supermarket chains like Albertson's, Safeway, Publix, Shaw's, H.E. Butt, Sainsbury's and Tesco have followed Wal-Mart's lead, developing large enterprise data warehouses that consolidate customer data stored in disparate data marts.

Wal-Mart has used its data warehousing technology over the years to analyze sales and inventory, market baskets and vendor information. In the mid-1990s, early adopters like Wal-Mart "used market-basket data to identify which items to promote and assess the effectiveness of the promotions," said Schultz.

Category management and space management are two headquarter-level applications that were developed as a result of the scanning revolution in the 1970s and the easy availability of scan data. One of the first chains to analyze scan data was Ralphs, which set up a scan analysis department in the late 1970s under the direction of Lanny Hernandez, a pioneer in analytical retail solutions who now runs the ALH Group, San Luis Obispo, Calif. "Ralphs was an early implementer of both scanning and using scan data," said Hernandez.

Some of the early Ralphs projects were forerunners of today's space management systems. Looking at the crackers section, for example, Ralphs saw that products ranged from 1/2-week of supply to 52 weeks. "We did resets and we reduced space by 20% to 30% and found sales improved," said Hernandez.

Hernandez got some of his space management ideas from Jack Lewis of Anheuser-Busch, who developed what is considered the first planogram-making space management system, Accu-Space, in 1985. That product showed the "correlation between profit and space," Lewis, now retired, told SN. It was employed by Ralphs, Pathmark and Kroger, among others. "We eliminated one Anheuser-Busch delivery per week to Ralphs," Lewis said.

The early space management programs "came out of the manufacturer side," noted Kevin Stadler, senior vice president of collaborative business solutions for JDA Software, Scottsdale, Ariz.

"[Retailers] started bringing space management in-house in the late 1980s and early 1990s to validate the manufacturer and broker information," said Gene Ponti, North American product manager, ACNielsen.

In late 1977, when Ralphs developed one of the first private-label programs, Hernandez analyzed the sales rates of private-label products and their effect on other products in what was one of the first category management studies.

H.E. Butt and Hannaford were also early adopters of category management. H.E. Butt launched category management in the late 1980s as it adopted an EDLP pricing scheme.

Hernandez left Ralphs in the early 1980s and formed ABA Groups with another category management pioneer, Brian Harris. That company developed one of the first space management systems, Apollo, which it sold to IRI in 1987. Also in the early 1980s, Bob Cohen launched Logistics Data Systems, another small software company that developed the Spaceman space management program, subsequently sold to ACNielsen. Vaughn Roller, meanwhile, started MarketMax, marketer of the Spacemax space management system.

In the late 1980s, ACNielsen and IRI began buying scan data from retailers and reselling it to manufacturers, launching a significant POS data marketing industry. "For the first time, manufacturers could see what sold by the week at various chains in a market," said Danny Sacco, vice president, retail services, ACNielsen.

A popular headquarters application in the mid-1980s was direct-product profitability (DPP), which looked at the profit contribution of each product, including the costs it engendered. DPP led to the development of activity-based costing (ABC), which carefully assessed the costs created by each product. ABC, along with category management, set the stage for Efficient Consumer Response (ECR), the industry's huge initiative in the 1990s, noted Stadler.

Schnuck Markets was an early user of DPP analysis, but DPP "went by the wayside because it was too hard to do," said Stadler.

A key challenge for headquarters systems was getting the POS data from stores transmitted to headquarters and getting price updates transmitted to stores. For years, that process depended on dial-up connections, but ensuing communication advances have increased the speed and efficiency of the process. Additionally, as electronic payment processing came into vogue in the 1990s, chains sought ways to improve the efficiency and cut the costs of those transmissions.

Satellite technology has been used by some large, widely distributed chains over the years, including Wal-Mart, H.E. Butt, Kroger and Winn-Dixie.

Meanwhile, other land-based communication technology came along to improve communication links, including T1 lines, ISDN and frame relay. The Internet has spawned such applications as virtual private networks (VPNs) and voice-over IP, which are starting to be adopted.

Companies' IT systems, from the headquarters to the stores to the distribution center, were vulnerable to the so-called Y2K bug, which threatened to derail systems unprepared for the date change from the 1900s to 2000.

"People were frightened about Y2K," said Michael Sansolo, senior vice president, Food Marketing Institute. "FMI was barraged about how we weren't going to be ready." Added Sansolo: "What was great was that we worked as a supply chain -- manufacturers, retailers and wholesalers -- to get ready. We ran tests so there wasn't a mad scramble in November 1999." While January 2000 passed uneventfully, Sansolo said, "If we hadn't done what we did, we would have had problems."