Working out kinks in the retail supply chain

A crystal ball would be a welcome addition to any retailer’s arsenal of supply-chain management software. Barring that, Shaw’s Supermarkets Inc. aimed for the next closest thing – a tool that helps the grocer model the effects of any tweaks to its supply chain.

Shaw’s uses i2 Technologies Inc.’s Supply Chain Strategist software to help align its distribution network, which consists of two distribution centers, 185 stores and a third-party distribution partner.

I2’s Strategist is a scenario-based application – one module in i2’s suite of supply-chain management (SCM) software – which lets Shaw’s input data such as distribution capacity, store locations and operations costs. The software crunches the data so Shaw’s can analyze different alternatives.

Strategist lets the company perform what-if scenarios – such as “what happens if we increase the number of deliveries made each week to a particular store?” – and see the answer in minutes, says Mike Griswold, strategic process leader for supply-chain operations in West Bridgewater, Mass. “One of the things that Strategist provides is the ability to see how much our decisions are going to cost us,” he says.

Shaw’s has realized significant savings in storage, handling, inventory and freight costs by using the Strategist tool to help make decisions about which products and stores should be served by one of its distribution centers.

Incremental savings such as these are key in the retail industry, where profit margins are traditionally razor-thin. Retailers can boost the bottom line by using SCM software to squeeze out inefficiencies that occur in the process of getting products to the right stores, at the right time and in the right quantity.

SCM software costs vary widely. In general, a large retailer will pay in the $2 million range for a full warehouse-management system license; best-of-breed apps cost $200,000 to $400,000, estimates Peter Abell, director of research for retail at AMR Research Inc. For a retailer to revamp its entire processes can be astronomical: One large national retailer had a multiyear contract that cost approximately $50 million, Abell says.

Among the SCM projects given priority today are those that aim to improve store-level forecasting. Retailers want greater visibility into what’s going on not only at distribution centers but in each store, experts say. A handful of vendors specialize in retail SCM software, such as Retek Inc., JDA Software Group Inc. and Manhattan Associates Inc., and generalist SCM vendors with retail-industry coverage, such as i2, Manugistics Group Inc. and SAP AG.

“Retailers have started to recognize that the supply chain really goes down to the individual store,” Abell says. The better retailers are addressing demand replenishment on a store-by-store basis and incorporating “causal factors” into their forecasts, he says. For a local event such as a Little League championship, one store might want a healthy stock of lawn chairs and picnic accessories.

Key to avoiding overstocks and out-of-stocks is communication among retailers and suppliers. The hot trend is collaborative planning, forecasting and replenishment (CPFR). CPFR is a concept developed by the Voluntary Interindustry Commerce Standards (VICS) association, which has outlined nine steps that constitute CPFR.

CPFR is based on retailers and suppliers sharing forecast information that is traditionally kept guarded from business partners.

Ace Hardware Corp. is doing CPFR with 26 of its suppliers, says Scott Smith, department manager for inventory at the Oak Brook, Ill., hardware chain. The arrangement lets Ace suppliers such as Manco, a manufacturer of home improvement supplies including duct tape, gain access to Ace’s systems – which are built on JDA Software’s E3 suite of SCM software. From there, suppliers can collaborate with retailers on sales forecasts and promotions planning and even write their own purchase orders.

The appeal of CPFR is that it capitalizes on each party’s particular strengths, Smith says. Ace knows product demand histories for each of its stores, and Manco has product knowledge and insight into seasonal and geographic buying trends. Sharing ideas makes for more accurate forecasting and more efficient replenishment.

The extra sets of eyes are key. “When you do things in isolation, you don’t give people the opportunity to help improve your product,” Smith says. The efficiency gains show up on the bottom line: Among the initial group of Ace suppliers doing CPFR, sales of their products in Ace stores rose 10.3 percent in 2001, Smith says. For Ace, the collaboration has helped the company triple its full-palette purchases – which are more economical than partial-palette buys – and trim 20 percent off labor costs associated with receiving merchandise from its CPFR partners.

Smith says the project paid for itself in 30 days, essentially because Ace’s investment was minimal. Ace paid less than $50,000 because the company was a pilot tester for the JDA Software.

Ace is doing CPFR with 26 manufacturers. Combined, the group handled $97 million in purchases last year through CPFR. Smith’s goal is to hit $200 million this year.

The scale of Ace’s CPFR trial puts the retailer among the very early adopters of the technology. While many companies have experimented with limited pilots, few do widespread CPFR. Part of the reason is that implementing CPFR is a labor-intensive process and requires that retailers’ and suppliers’ systems can communicate.

At its most basic level, CPFR software is like integration middleware; it provides a platform for exchanging transaction data and often depends on batch processes to port data to and from outside systems. As the technology matures, CPFR will move toward process-oriented, real-time collaboration.

Much of the implementation complexity is because of variations in the data different systems collect, according to Gartner Inc. Supply-chain collaboration software typically looks at an account or retail-store level, while existing systems forecast demand at a regional level. Integrating CPFR pilots with existing systems can require companies to reimplement their demand-planning systems to reconcile differences in data granularity, Gartner says.

A lack of standards also is a deployment deterrent, although progress is occurring. Standards bodies Uniform Code Council and its European equivalent, EAN International, are cooperating to create CPFR standards, including new XML schemas. Last month, a handful of SCM vendors, including JDA, i2, Manugistics, SAP and Syncra Systems Inc., announced plans to test the interoperability of their CPFR products this summer.