Integration Lesson

MICHAEL GARRY

This past August, Save Mart Supermarkets, Modesto, Calif., achieved a significant milestone, completing the installation of a new supply chain management system at its 250,000-square-foot perishables and nonfood warehouse in Merced, Calif., known as Yosemite Wholesale.

Aashish Chandra

This marked the end of a two-year process that included not just the Merced facility, but two other distribution centers that Save Mart acquired in 2007 from Albertsons LLC, along with 128 stores in Northern California and Northern Nevada. The privately held chain now operates 244 stores, with estimated sales of $4.9 billion.

Save Mart's two acquired distribution centers — an 850,000-square-foot grocery warehouse in Vacaville, Calif., and a 450,000-square-foot perishables warehouse in Roseville, Calif. — and its Merced facility now all run on a supply chain management suite from Dallas-based Retalix USA. The suite includes four major modules: Biceps (purchasing and inventory management), Prompt (payment reconciliation), ABS (ordering and billing management) and Triceps (warehouse management).

Save Mart, which just prior to Labor Day announced it was restructuring its top-level management and eliminating 36 positions at all levels, has worked on several fronts to integrate the company since the Albertsons acquisitions, from stores and technology to distribution and corporate support. It is continuing this process, and on the supply chain front, appears to have achieved a considerable degree of integration with the implementation of new systems at its three major warehouses. (Save Mart also shares a grocery and frozen food facility with Raley's Supermarkets in Lathrop, Calif., that is run by a third-party operator.) The uniform technology platform is resulting in synergies across buying, logistics and inventory management.

The integration of Save Mart's three DCs was anything but a trivial exercise, and serves as an object lesson in the challenges a retail chain can face as it seeks to expand through acquisition.

THE BIG BANG

When Save Mart acquired Albertsons' two DCs, they were still linked to the datacenter operated by original owner Supervalu, and had to remain that way for the foreseeable future. So Save Mart signed a transition services agreement (TSA), under which the DCs ran on dual networks, one connected to Supervalu and one to Save Mart. The underlying supply chain management continued to be Supervalu's proprietary IDMS system.

“The deal was to continue using their technology and infrastructure until we could replace it with ours,” said Aashish Chandra, Save Mart's senior director of IT and enterprise PMO, who oversaw the implementation of the new DC technology for the chain.

The not inconsiderable challenge for Save Mart in transitioning to its own technology for the acquired DCs, Chandra explained, was that one, it was under a time constraint, and two, Supervalu's systems were themselves so tightly integrated that they could only be removed all at once - not individually. In effect, Save Mart was facing a “big bang” implementation - the installation of a complex network of systems in one or two days.

The conventional wisdom about big bang implementations is that they are too risky. But a step-by-step approach could take 18 to 24 months and “we did not have that option because of the TSA,” said Chandra.

Initially, Save Mart executives considered selling the Vacaville DC and using a third party — possibly the shared Lathrop DC — to supply that depot's grocery products. The decision was eventually made to keep the Vacaville facility, but in the process the Roseville DC was targeted for the initial big bang technology installation.

The changeover at Roseville took place in 52 hours over one weekend in mid-August 2008. In addition to the Retalix systems, Save Mart's IT team had to transfer software licenses and data for Supervalu applications such as iTradeNetwork for real-time buying of perishables and an ad-demand tool for ordering additional quantities for promotions. Save Mart also decided to implement best-of-breed distribution systems such as a JDA Software's Manugistics transportation management system for routing deliveries, voice-based selection from Vocollect, and Qualcomm's wireless communication system.

The transition to these systems at the Vacaville DC was a bit more leisurely, taking place over three weekends in September of last year. During the first weekend, Chandra's team put in a new infrastructure, which was checked during the second weekend, and followed by the systems implementation on the third weekend. Vacaville also had its own flavor, including union-driven labor standards that had to be accommodated, he said.

While Supervalu was a good partner, once the two DCs were converted to Save Mart's control, “there was a sigh of relief that we were not dependent on a third party to run our 24-by-7 operations,” Chandra said. And the Retalix systems represent “a step up” from Supervalu's platform. “We were able to tighten labor standards and reduce work hours, while improving efficiencies in operations at Roseville and Vacaville,” he said.

OPTIMIZING TRANSPORTATION

Unlike Roseville and Vacaville, the Merced facility was Save Mart's legacy DC and did not have to be converted to new technology. Still, there were several solid supply-chain reasons for doing so, explained Chandra. For example, it was running on internally developed technology and infrastructure that was more than 30 years old, as well as 15-year-old Lawson software. Many of its processes, such as routing, were manual.

But perhaps more compelling was the disconnect between the Merced DC and the acquired DCs. Each DC was operating separately from the others, which resulted in major shipping inefficiencies. “We had trucks from one DC delivering to a store 100 miles away that was next to another DC,” he said. “We wasted so much money it was incredible. And the cost of goods was impacted by that. So we wanted to optimize transportation.”

Save Mart also wanted to centralize buying rather than allow each DC to buy its own products. “We had multiple buyers for the same product line,” said Chandra. “They were buying products for a much smaller store base and not getting the same kind of deals they would get if they bought for the entire chain.” Still another motivation was Save Mart's desire to do most if not all of its distribution rather than relying in part on grocery wholesalers to make up the slack.

Given all of these factors, Save Mart proceeded this year to put in the same suite of systems and infrastructure in Merced that it had in Vacaville and Roseville, beginning in April and completing the job in August - not a big bang but much faster than most changeovers of this kind.

By harmonizing the three DC's, Save Mart has been able to reduce inventory levels and cut item counts by thousands of items “because of the synergies” obtained. In addition, the chain has also been able to proceed with supply-chain upgrades such as transportation optimization and sourcing and SKU rationalization. And it has also launched centralized buying this year, helping to reduce the cost of goods, said Chandra. Overall, it has made progress toward its vision of being as self-distributing as possible.

Save Mart also took advantage of the technology overhaul at its DCs to make other changes in company practices. “Any time you make a change, it is an opportunity to improve,” said Chandra.

One example is inventory costing. At the Vacaville and Roseville facilities the chain was using LIFO (last-in, first out) costing while at Merced the chain was employing MAC (moving average cost). So it decided to centralize the processes by moving to MAC at the two acquired facilities.

“Having separate costing led to confusion,” said Chandra. “We couldn't compare the cost of goods across the business. So we wanted to stabilize costing.” MAC was preferred because it “results in less volatility over time.”

In selecting Retalix rather than other supply chain vendors, Save Mart opted for older, more time-tested technology rather than more sophisticated alternatives. “It's an incredibly lean and efficient platform that absolutely nails business-user requirements,” James Sims, Save Mart's chief information officer, told SN earlier this year.

But Retalix posed some challenges, such as the fact that it was written in 30-year-old COBOL programming language. To avoid having to hire hard-to-find COBOL programmers, Chandra decided to base all customization of the software on modern languages such as Microsoft C, PerlScript and PL/SQL that his existing staff knew or could learn.

Chandra declined to provide the cost of the Retalix systems but said “it was a very reasonable price.” Although the implementation was not an “ROI project,” since the changeover at the acquired DCs was a necessity, and the ROI of supply chain technology is “hard to prove,” he cited “millions of dollars in savings” stemming from the reduction in the cost of goods and from transportation optimization. “In the first few months, we were able to reap the benefits of the technology,” he said. “The payback was less than a year.”

AT A GLANCE

SAVE MART'S DC TOOL BOX