Magazine Article | April 17, 2008

Improve Your In-Stock Position

Source: Innovative Retail Technologies

Inventory and merchandise management improvements were key to Longo’s success with online grocery, and those improvements have boosted store performance, too.

Integrated Solutions For Retailers, May 2008

FeatureIn 2004, Anthony Longo presented John Charleson with a challenging exercise. Longo, CEO of the Toronto grocery chain that bears his name, was interviewing Charleson for the position of director of IT. "We're replacing our legacy ERP [enterprise resource planning] system," said Longo. "Analyze its problems, and create an RFP we can use to procure its replacement."

Anticipating it would eventually garner him the position (and a paycheck), Charleson rolled up his sleeves and dug into the ERP-related issues Longo's faced. What he found were data disparity issues bred from too many loosely guarded, one-to-one points of integration. "We were in a bad situation because we had inconsistent and inaccurate data due to poor data synchronization," says Charleson. "For example, our ERP system would exchange data with our scales via a specific interface built for that, it would exchange data with the POS using another interface, and it would use still another interface to communicate with the WMS [warehouse management system]." As a result, Charleson says IT staffers at Longo's spent roughly 30% of their time managing interface issues.

Business efficiency problems aside, data disparity became apparent to consumers when items either weren't on file, were assigned different prices in different systems, or were out of stock. "The way our WMS and the ERP system talked to each other, the ERP system might not have known when an item was out of stock because the WMS didn't automate shipping notices, so we had higher out-of-stocks than what we considered acceptable," Charleson says. The price management problem could cause items to ring up inaccurately at the POS or cause them to be promoted at the wrong price point in sales flyers. In some cases, price changes were pushed to some stores, but not others. What these instances of data inaccuracy all have in common is their potentially negative effect on margins and profit. At best, Longo's didn't know how pricing inaccuracy would impact margins. At worst, margins could suffer significantly. These issues continued to create inefficiency when they were identified, causing time-consuming manual investigation and correction.

Cross-Channel Challenges
Having adequately demonstrated his commitment to solving the company's inventory and merchandise management struggles, Charleson was brought on board at Longo's. He immediately set to work reviewing the proposals his RFP had garnered. In the throes of the decision-making process, Longo's threw him a curveball. The retailer acquired Grocery Gateway, one of many online grocers that had gone belly-up after failing to make something profitable out of a niche grocery fulfillment model. The ERP fix was put on hold until Grocery Gateway was up and running.

Founded in 1998, Grocery Gateway had grown its customer base to a critical mass, but couldn't develop a profitable fulfillment model. But since lifting Grocery Gateway out of bankruptcy in 2004, Longo's has achieved double-digit annual growth with the offering. Charleson says that while all of his stores are achieving same-store sales growth, none of his stores are growing as quickly as the online channel. Changing the fulfillment model was central to the turnaround. Longo's pared back the geographic area that Grocery Gateway served and shut down the central warehouse that had previously served as the DC for Grocery Gateway delivery people. Five Longo's stores are now used as fulfillment centers for Grocery Gateway.

Longo's stores are open to the public for shopping from 7 a.m. to 10 p.m. In the five stores that fulfill orders for Grocery Gateway, night staffers begin their shifts at 10 p.m., picking from 500 to 1,000 separate orders per night. The orders are placed in totes and appropriately stored in refrigerators or freezers, until loaded onto trucks for delivery within a window of time specified by the customers.

Many major retailers with inherently logical cross-channel merchandise plays (books, music, and electronics) struggle to consolidate inventory and fulfillment models from one channel to the next. Longo's presents a cross-channel inventory management success story in grocery — an unlikely sub- vertical for cross-channel retail success. In Toronto, competitor Loblaws bailed on the concept after a five-year pilot, and in the United States only a handful of grocery chains have experienced longevity with outsourced solutions such as that offered by MyWebGrocer. At Longo's, Grocery Gateway sales account for a significant double-digit percentage of the retailer's total business volume.

Inventory, Merchandise Management Enable Cross-Channel Grocery
With the fulfillment model and a brand-new fleet of refrigerated delivery trucks in place, it was time to nail down a fix for the ERP system. Charleson whittled down the front-runners from more than 20, ultimately selecting Tomax for its inventory and merchandise management software. The selection proved beneficial to both Longo's brick-and-mortar stores and its fledgling online business. "We first went live with the Tomax order management piece in October 2005," says Charleson. "We pulled the order management piece out of the main project and did a hurry-up to push that one through so that we could support the Grocery Gateway business." This required Longo's to run Tomax and its ERP system parallel for a period of time, building temporary interfaces between the two as Tomax managed the products for Grocery Gateway, and the legacy ERP system continued to serve stores. Meanwhile, the retailer set  up SKUs for an eventual transfer to Tomax, and in May 2006, it dedicated a weekend to turning off its old ERP system and bringing up Tomax.

"When we acquired Grocery Gateway, we took receipt of the company's technology [servers and code] and its customers. We did not get its WMS," explains Charleson. "On day one, to maintain continuity of service for Grocery Gateway customers, we were forced to go with a paper-pick solution." Customers submitted shopping lists on the Grocery Gateway Web site, which arranged the lists in proper picking order. Night shoppers simply consulted the list as they walked their routes, checking off items as they picked them. Then they'd roll their carts to the POS, scan the items, bag them, and prepare them for delivery as previously described.

But, that paper-based approach changed when the company implemented the Tomax Order Management application, which is fed orders from the Web. Today, night shoppers carry Symbol MC3090 wireless handheld units, which receive the shopping lists from Tomax. They scan the items as they pick them, taking the merchandise out of inventory and adding up the total as they go. The total order is rung up on the handheld and sent back to the Grocery Gateway e-commerce transaction engine for transaction processing, taking the traditional POS station out of the equation.

Visibility Improves In-Stock Position
The goal for pricing and inventory data management at Longo's is to reach the point where data is only entered once, then shared among applications in consistent fashion. "We're very much focused on getting to one version of the truth, and we've moved pretty far down that path," says Charleson. "We use virtually everything in the suite, with the exception of POS [Howell Data Systems and Loc Software], labor scheduling [homegrown application], and workforce management [Kronos]," he says. Oracle's eBusiness suite handles financials and HR. The Microsoft BizTalk server, an SOA (service-oriented architecture) middle tier, facilitates the information that's shared among peripheral applications (e.g. scales and POS). For example, if a new item is created in the Tomax inventory management application, marked fields in BizTalk denote that data is intended for the POS and the WMS. When the item's SKU is entered, that notation must be made, in addition to other relevant notations (i.e. weighed items must be marked to interface with scales). Ideally, that information never needs to be entered again at any point of integration. Changes to the data are handled centrally as well. "When I execute a price change, BizTalk knows that the POS needs that price change information. But my WMS doesn't care if there's a price change at the store level, because that's not what it's there for. So BizTalk feeds that price change data only to relevant applications."

Using SOA as a middle tier eliminates concern about integration between Tomax and, say, multiple POS formats at the store level. "I can switch out components on the outside edge very easily. The item information or the POS information fed out of Tomax into the BizTalk server can then be shared with several different POS systems using only one interface — from the POS to the middle tier — rather than the POS to Tomax. That's much simpler an environment to manage going forward," Charleson says.

Longo's also simplified store-level replenishment with Tomax, moving to a single process for order management. "Store associates create replenishment demand signals in our inventory management system simply by scanning the shelf," Charleson says. "Before, they had to know where the product was coming from and if it was a warehouse-stocked item, a direct store delivery item, or a cross-docked item. Separate orders had to be created for each of those." Now, the single-order process from Tomax consolidates all the demand signals from stores and creates the appropriate purchase order.

The inventory visibility achieved by the move toward a 'single version of the truth' has helped Longo's increase its in-stock position at the warehouse level to 98.5%, a 1.5% improvement. While 1.5% might not sound like an earth-shattering amount, consider that it represents 300 of Longo's 20,000 SKUs. That means the chain has 300 more products available for purchase at the store level now, which can create considerable top-line and bottom-line gains.