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Efficient replenishment: the key to ECR.

In the cost-cutting world of efficient consumer response, one of the basic tenets is the paperless flow of information to the supplier and smooth flow of product back to the retailer/wholesaler. Two words have been used to describe this process: efficient replenishment.

Efficient replenishment is supposed to "provide the right product, to the right place, at the right time, in the right quantity, and in the most efficient manner possible," says Kurt Salmon Associates in its seminal report on ECR.

(A note on terms: Efficient replenishment is the term used in the Kurt Salmon Associates report to describe the complete replenishment loop between suppliers and stores. This process is often referred to as continuous replenishment. However, that term is used by Kurt Salmon Associates and in this article to refer to only a segment of the loop--warehouse replenishment.)

The Salmon report predicts that efficient replenishment has "the potential for reducing overall supply chain costs by 2.8% and chainwide inventory levels by at least 50%. These benefits are roughly split between the supplier and distributor."

Efficient replenishment is a fairly complex process, but it consists of two basic parts: replensihment of warehouses from the supplier; and replenishment of the stores from the warehouse. True efficient replenishment, says Kurt Salmon Associates, merges these two segments "into a single, unified replenishment loop--from supplier to point-of-sale." It is ideally driven by the most accurate reflection of demand: POS scan data.

But to begin with, grocers are encouraged to support each segment of the efficient replenishment loop separately--an effort Kurt Salmon Associates predicts could be completed by the end of 1994. The merging of the two would come later--by the end of 1996.

So far, only a limited number of grocers have attempted to automate the ordering of goods from warehouse to store in a process called computer-aided ordering (CAO). (See "Inventory control: Moving ahead," Progressive Grocer, January 1993.) These efforts have been stymied by the difficulty of getting accurate scan data to drive the process. (See "How's your scan data?," Progressive Grocer, October 1992.)

Much more of the action has been focused on replenishing the warehouse, using warehouse withdrawal or sales information, rather than store scan data. This process is called a continuous replenishment program (CRP) or, since the supplier is usually in charge, vendor-managed replenishment. In a survey conducted last year of 40 of the 50 largest grocery chains by LogiCNet (a division of Chicago-based IRI), 15 were involved in vendor-managed continuous replenishment programs.

One of the more progressive supermarket operators in efficient replenishment is Giant Food, Landover, Md. For the past year, Giant has participated in vendor-managed replenishment with several suppliers (Procter & Gamble, Nabisco, James River and Ocean Spray), transmitting warehouse withdrawal data daily to them through UCS transaction set 852. Giant also transmits information on promotions, coupons and new items on a manual basis. The suppliers then use the data to create forecasts of product needs, and ultimately to generate orders.

At press time, Giant was planning to kick off a pilot replenishment program with Kellogg that could put the retailer at the forefront of the industry. This program, using an order-creation system called distribution resource planning (DRP), places Giant, as opposed to its suppliers, in control of the ordering process. DRP relies on software devised by LogiCNet.

Giant's replenishment program will work initially like this: The chain runs a forecasting program that is driven by warehouse data consisting of weekly withdrawals going back as far as two years. The forecast also covers promotions. (Giant uses software called FYI Forecaster from Think Systems, Parsippany, N.J.) This will determine, for example, that the warehouse needs 10,000 cases of Kellogg's Special K cereal, among other products, next week.

That forecast is fed into the LogiCNet DRP system, a Windows-based program that factors in the vendor lead time, the safety stock of Special K (to prevent stockouts), whether the vendor ships by pallet or by case, and the delivery schedule to Giant's warehouse, among other factors.

The DRP program then calculates that Giant should order 18,000 cases of Special K on Feb. 1 to satisfy two weeks of demand, safety stock, lead times and other factors. That information is communicated to Kellogg via UCS transaction set 830; Kellogg sends back a purchase order acknowledgement via UCS transaction set 855.

Among the benefits Giant hopes to gain from DRP are better service levels, inventory reduction, lead-time reduction, and cost reduction in warehousing and transportation.

Eventually, Giant will compare the results of its DRP program with the vendor-managed program. The DRP program will be monitored by Bernard Lalonde, professor at Ohio State University. Initial results are expected around March of next year.

Loren Johnson, Giant's manager of systems and programming, says the DRP program is probably preferable because it puts Giant in control of its own destiny and incorporates promotional and other elements that Giant is manually communicating to vendors in the vendor-managed program. But until the results are in on DRP, he says, "I'm not putting any bets on it."

It may turn out that DRP and vendor-managed replenishment can coexist, says Johnson. "I've gotten a mixed reaction from vendors," he says. "Some vendors question the retailer's ability to do a good job of forecasting. Others think the retailer's forecasts are great. It depends on how good they think they are."

If Giant is successful with its warehouse replenishing DRP program, the next step could be forecasting from the store level--the realization of the ECR vision. Unlike warehouse-level forecasts, store-level forecasts are based on POS scan data--actual daily consumer purchases driving replenishment all the way up to the supplier. The store-level forecasts are fed into a central DRP program, which, as with the current program, generates replenishment orders.

Giant has made no commitment to store-level forecasting, pending the results of its pilot. "We want to walk before we can run," says Johnson.

But Andre Martin, LogiCNet's chairman and CEO, insists that, to take the most costs out of the pipeline, "store movement should drive replenishment." To Martin, the only true uncertainty in the distribution pipeline exists at the point of consumption--or at the stores. Uncertainty can be eliminated at every other point in the pipeline, so forecasting is most effectively done at the store level, he says.

"My worry," he adds, "is that most vendor-managed programs today are only designed to handle movement of product from the manufacturer DC [distribution center] to the retail DC. It's not equipped to take the next step--replenishment from individual stores. When retailers and manufacturers are ready to take the next step, they'll have to throw away the software they're now using, which is not designed to encompass the whole pipeline."

Notwithstanding Martin's concerns, Giant has participated in a vendor-managed program with P&G for more than a year, replenishing disposable diapers, paper towels and tissues, hard-surface cleaners, detergents and health and beauty products. For the first three categories, the program produced a savings for Giant of $736,000 in inventory and ongoing expenses.

In some cases, the reduction in P&G warehouse inventory was more than 50%, says Johnson. In addition, warehouse turns for P&G items were increased "dramatically," he says, while lead time was "in many cases reduced by two to three days." Moreover, it took fewer than 1,000 hours of development time to get the vendor-managed program going, he adds.

For some suppliers, however, vendor-managed replenishment programs have not led to dramatic improvements in inventory or turns, says Johnson. He attributes that to the nature of the product line. Slow moving or small items--which take longer to fill a truck--won't reap the same benefits as high volume, bulky items, he notes.

Although vendor-managed replenishment programs are often predicated on the elimination of forward buys, Giant, a high/low operator, has negotiated with some vendors to allow forward buys in its programs. In those cases, Giant accepts that the inventory reduction will be less than it would be without forward buys, notes Johnson.

From the supplier's point of view, vendor-managed programs pose some difficulties. For example, Joe Andraski, Nabisco Foods' vice president, integrated logistics, believes that manufacturers can't handle an unlimited number of customers. "Once the number gets into the 15 to 20 range, manufacturers are going to have to consider the administrative effort involved." At that point, he says, retailers will have to take over the ordering burden, using a system like the one Giant is testing.

Maurice Mora, senior manager, customer systems, Colgate-Palmolive, points out that not all retailers send the same type of data. "Some want inventory managed down to the shelf level, so they provide detailed POS data from stores," says Mora. "Some want inventory managed to the DC, so they send withdrawal data. This disparity in data presents a problem."

To avoid running different systems for different customers, Mora says, suppliers need to normalize or standardize the data, making it more homogeneous. Another option is to use a third party that can collect the data and present it in a more homogeneous way. (See sidebar on third-party replenishment aids.)

In any event, as the ECR initiative unfolds, suppliers and manufacturers will continue to evaluate replenishment scenarios and try to develop ones that work. Whether that will ultimately include store-level data remains to be seen.

Third-party replenishment aids

* Non-Stop Logistics: A new approach to replenishment is taking shape in the form of Non-Stop Logistics, a San Francisco-based start-up company that has A.C. Nielsen as one of its major investors. (Other investors include Sun Microsystems and Oracle Corp.)

Non-Stop Logistics is planning to build "flow-through" distribution centers, where product (particularly fast movers) would be received from suppliers, put on conveyor belts and directed into trucks for delivery to stores. In theory, there would be no warehousing of product--everything would be sorted out for immediate delivery.

The project is expected to start next summer with a distribution center in one market, eventually expanding to 40 markets, says Homer Dunn, president of Non-Stop Logistics. Initially, dry grocery and frozens will be targeted.

* Efficient Market Services (EMS), Deerfield, Ill., has recently begun working with a few manufacturers that have vendor-managed replenishment programs based on store, rather than warehouse sales. EMS collects the sales data at store level, calculates the forecasts (factoring in warehouse inventory) and supplies the results to the manufacturers, who use it to come up with replenishment orders.

EMS is presenting suppliers with the kind of standardized, usable data that they wouldn't receive from many different retailers and wholesalers, says Danny Moore, EMS's executive vice president.

In addition to forecasting, EMS "cleans" the scan data, removing checker and other errors. That enables suppliers or retailers to rely on the accuracy of the data in driving replenishment.

* Catalina Information Resources (CIR), a joint venture between Catalina Marketing Corp., Anaheim, Calif., and Information Resources Inc. (IRI), Chicago, uses Catalina's in-store couponing system in 1,100 stores to retrieve daily scan data and IRI's resources to clean, process and deliver the data for replenishment, new product tracking and promotional analysis.

The data accessed by CIR includes baseline sales plus incremental promotional activity, says Bob Billings, CIR's general manager. The data can be fed into forecasting and Distribution Resource Planning software, such as the one being tested by LogiCNet, a division of IRI. (See main story.) The CIR data is also being tested as a means of driving a DSD replenishment program for Dreyer's Ice Cream, says Billings.
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Title Annotation:Technology; includes related article on third-party replenishment services; efficient consumer response
Author:Garry, Michael
Publication:Progressive Grocer
Date:Dec 1, 1993
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