Trusting Computers

MICHAEL GARRY

Though automating a task is almost always considered preferable to doing it manually, in the U.S. food retailing business, most retailers still like to handle store ordering manually.

Among the top 10 companies on SN's Top 75 list of food retailers, just four allow computers to replenish their store shelves, determining how much of each item to order — and when to order it — to satisfy consumer demand, according to Michael Griswold, research director, retail, AMR Research, Boston.

“That means hundreds of billions of dollars in sales are being replenished manually,” he said. “You've got these large companies with lots at stake still ordering manually.” Among other retailers, automated ordering is also more the exception than the rule.

But retailers are beginning to think differently now about automated store ordering, which goes by a few different acronyms, including CAO (computer-assisted ordering) and CGO (computer-generated ordering). In a study AMR Research published last month, CGO and its related system, perpetual inventory (PI), were identified as important applications for 2008 by 14% of surveyed retailers, ranking second on the list after master data management.

“Since last October, I have seen an uptick in inquiries about CGO and PI from retailers,” said Griswold. “We're seeing more serious interest in 2008.”

U.S. retailers known to be engaged in automated store ordering include Hannaford Bros., Spartan Stores, Shaw's, Price Chopper, Longo Brothers Fruit Markets, Key Food Stores Co-op, Trader Joe's and Holiday Quality Foods. Vendors supporting the process include SAF, Aldata, Tomax, Teradata, Retalix, Ingen, Oracle and SAP. Automated ordering is more widely employed by retailers in Europe.

Hannaford Bros., Scarborough, Maine, a division of Brussels-based Delhaize Group, has been seriously interested in automated ordering, which it calls CAO, for several years, said Brian Fabre, retail support manager for the chain, who spoke about CAO at the Food Marketing Institute Show/Marketechnics in Las Vegas earlier this month.

In 2000, Kurt Salmon Associates did a study for Hannaford showing that 75% of its out-of-stocks were the result of faulty in-store practices such as poor stocking and underestimating demand. The chain decided to invest in CAO technologies that would address these practices, thereby preventing out-of-stocks and increasing sales. “The most important goal driving our CAO investment was increasing sales,” said Fabre.

Beginning with a two-store “proof-of-concept” and a two-store pilot in 2004, Hannaford has methodically rolled out CAO for warehouse-delivered Center Store items (including GM/HBC, dairy and frozens), category by category, store by store, across its 165 stores, completing its last store over a month ago. Hannaford, which is responsible for the IT operations of sister company Sweetbay Supermarkets, Tampa, Fla., is also supporting the implementation of CAO at Sweetbay's 105 stores.

The first 12 store implementations, which took four weeks per store, were done in the Albany, N.Y. area. In each district, one store was designated as the “lead store” that served as a “learning resource center” for the other stores, said Fabre.

The impact of CAO at Hannaford has been positive, reported Fabre. Out-of-stocks have been reduced by as much as 70% in some locations. “The industry average for out-of-stocks is 8%, but within six to eight weeks of going live on CAO, our out-of-stocks are closer to 2% to 3%,” he said. CAO also enabled Hannaford to get rid of slow-moving items, cutting their inventory by as much as 40% and yielding a savings of more than $3 million, said Fabre.

In March, Pierre-Olivier Beckers, chief executive officer of Delhaize Group, said in a conference call that the reduction of out-of-stocks can be credited with improving Hannaford's sales in 2007 by more than one percentage point.

CAO also eliminates the “worry and fear of losing your order clerks,” Fabre said. “CAO never takes a vacation, never gets sick or promoted, and it never quits.

“CAO works, unquestionably,” he continued, though he declined to state a payback period for Hannaford's investment in the technology.

Accurate Predictions

CAO has two primary components. One is a demand forecasting engine that predicts future sales of each product by assessing historical sales trends, promotional requirements, holiday sales, seasonality and other factors. Hannaford's centralized forecasting system is provided by SAF, based in Tagerwilen, Switzerland, with U.S. offices in Grapevine, Texas. Fabre said the system forecasts sales “with a great deal of accuracy.”

The other component is perpetual inventory, which keeps a running update of how much inventory is present in the store (on the shelf and in the backroom) at any given moment. “It keeps a real-time record of all front-end sales, returns, back-door receipts, damage adjustments, etc.,” said Fabre. Hannaford has developed its own PI system.

AMR's Griswold pointed out that the biggest challenge in implementing CAO is “change management” for store employees. Employees who previously handled the manual ordering process — some for many years — need to be moved into an inventory management role, monitoring such things as warehouse mispicks, damage, theft and in-stock conditions.

Recognizing this, Hannaford designed its rollout to occur a few categories at a time, so that “we could regulate the learning curve and ease retail users into the new system,” said Fabre. After some initial “push-back” from employees, they grow to like and trust the system, he added.

Fabre emphasized that although labor is reallocated in CAO, it is not reduced. “It was never our goal to reduce labor,” he said. However, Griswold said that some food retailers have reduced labor hours via CAO.

The initial learning process at each store includes a seven-hour training course for the store manager and the Center Store staff on CAO procedures. For ongoing training, the chain has incorporated CAO-specific documents into store training materials and is developing an Internet learning site.

Hannaford continuously monitors the performance of stores in regard to CAO. District managers audit store conditions, and reports are issued to store managers concerning store efforts to maintain data integrity. A corporate team provides support to employees at the stores.

Ross acknowledged that a number of things can happen to cause CAO to “act unexpectedly.” Much of this relates to the store discipline required to maintain the perpetual inventory. For example, if a store delivery is not accurately accounted for in the inventory system, “it could become a serious issue,” he said. Cashiers need to be trained to scan every item.

To prevent such snafus, Hannaford employs a task management system from Reflexis Systems, Dedham, Mass., that assigns tasks to store employees, tracks whether the tasks are completed and sends alerts if necessary.

While all of Hannaford's Center Store products are ordered through CAO, store staff spends about 15 minutes per day dealing with “exceptions” that cannot be ordered through the system, Fabre said. Stores are allowed to override automated orders with justification, though they are required to review whether a change was ultimately worth making.

Hannaford plans to apply CAO to two areas of the store still ordered manually: perishables and direct-store-delivery items. In the case of perishables, this move will require that hundreds of planograms be created by the JDA space management system. In addition, scratch items will need to be made according to a standard production technique, and perishables shrink will need to be calculated differently.